The U.S. economy closed out 2024 with steady growth, propelled by resilient consumer spending that more than offset challenges in business investment and global trade. Despite high interest rates and ongoing inflation pressures, the nation’s economic momentum remained intact, setting the stage for an uncertain but potentially strong 2025.
Gross domestic product (GDP), adjusted for inflation, rose at an annualized 2.3 percent rate in the fourth quarter, down from 3.1 percent in the prior three months, the Commerce Department reported Thursday. For the full year, the economy expanded 2.8 percent, slightly below the 2.9 percent growth in 2023, but outpacing many economists’ forecasts at the start of the year.
The primary driver of fourth-quarter expansion was consumer spending, which grew at a 4.2 percent annual pace, its strongest since early 2023. Households increased purchases of goods, including motor vehicles and clothing, while demand for healthcare, transportation, and other services also strengthened. The surge in spending, particularly in November and December, may have been influenced by rising consumer confidence following Donald Trump’s election victory in November, which lifted sentiment about current economic conditions.
The labor market remained a source of stability. Unemployment ended the year at 4.1 percent, while inflation-adjusted after-tax income grew at a 2.8 percent annual pace in the fourth quarter, providing households with additional spending power.
After two consecutive quarters of contraction, the housing market showed signs of revival, with residential investment rising at a 5.3 percent annualized rate. The uptick was attributed in part to falling mortgage rates late in the year, which encouraged new home construction and renovations. However, existing home sales remained weak, as many homeowners stayed on the sidelines due to higher long-term borrowing costs.
On the business side, investment slowed. Nonresidential fixed investment declined by 2.2 percent, the first drop in more than three years, weighed down by an eight-week strike at Boeing that disrupted aircraft production. Business spending on equipment fell by 7.8 percent, while corporate investment in structures dropped for a second consecutive quarter. Some economists pointed to rising uncertainty over trade policy and interest rates as factors contributing to a more cautious investment outlook.
Despite solid economic expansion, inflation remained a challenge. The Federal Reserve’s preferred inflation measure—the Personal Consumption Expenditures (PCE) index—rose at a 2.3 percent annualized pace in the fourth quarter, up from 1.5 percent in the previous quarter. Excluding food and energy, core PCE inflation stood at 2.5 percent, a slight increase from the third quarter.
The Fed opted to hold interest rates steady at its January meeting, signaling that while inflation has moderated from its 2022 highs, policymakers are wary of cutting rates too soon.
While the U.S. economy has outperformed many of its global peers, uncertainty over trade policy and government spending could shape growth in the coming months. The Trump administration has signaled an expansion of tariffs on imports, potentially as soon as this weekend, aiming to boost domestic manufacturing and reduce trade imbalances. While such policies may encourage investment in American industry, businesses are also bracing for potential supply chain disruptions and cost increases.
At the same time, the administration has floated a government spending freeze and policy changes in immigration, both of which could impact labor markets and economic growth. Some analysts believe businesses moved up inventory purchases late in 2024 to get ahead of potential tariff increases, temporarily boosting GDP.
The economy enters the new year with significant momentum, despite looming policy shifts. Rising consumer confidence, a stabilizing housing market, and a resilient labor market provide a solid foundation for continued expansion. However, headwinds—including inflation risks, trade policy adjustments, and global economic weakness—could test that strength in the months ahead.
For now, consumers remain the engine of economic growth—an engine that, at least in the final stretch of 2024, ran stronger than most had predicted.
Since the election, business optimism has surged, driven by expectations of tax cuts, deregulation, and tariffs designed to promote domestic production. Many business leaders anticipate a more favorable policy environment that will reduce regulatory burdens and encourage investment in U.S. manufacturing. The prospect of lower corporate taxes has further bolstered sentiment, with some firms accelerating hiring and capital expenditures in anticipation of improved profitability. This renewed optimism has contributed to a stock market rally and heightened expectations for stronger business activity in 2025.