U.S. economic growth slows but consumer spending remains strong

Thursday 30 January 2025 - 16:34

The U.S. economy experienced a slowdown in growth during the fourth quarter, though strong domestic demand is expected to keep the Federal Reserve cautious in its approach to interest rate cuts.

According to the Commerce Department’s Bureau of Economic Analysis, the gross domestic product (GDP) expanded at an annualized rate of 2.3% in the last quarter, following a 3.1% increase in the previous three-month period. Analysts had projected a slightly higher 2.6% growth rate, with estimates ranging from 1.7% to 3.2%.

This moderation in growth comes amid a record-high goods trade deficit in December, which led the Atlanta Federal Reserve to revise its GDP forecast downward from 3.2% to 2.3%. Despite this deceleration, the economy has managed to surpass expectations, avoiding a recession despite aggressive interest rate hikes totaling 5.25 percentage points in 2022 and 2023 to curb inflation.

The Federal Reserve recently kept its benchmark interest rate within the 4.25%-4.50% range, marking a reduction of 100 basis points since September. In its latest policy statement, the central bank removed references to inflation making progress toward its 2% target. Fed Chair Jerome Powell noted that the economy remains "strong overall," and the institution has now projected only two rate cuts for the year, down from four estimated earlier.

Economic uncertainty persists due to potential fiscal, trade, and immigration policy shifts under the new administration. Analysts anticipate that proposed tax reductions, expanded tariffs, and immigration policies could contribute to inflationary pressures, potentially slowing growth in the latter half of the year.

A surge in imports, driven by businesses stockpiling ahead of anticipated tariffs and a potential port strike, widened the trade deficit significantly. Nevertheless, consumer spending—comprising over two-thirds of the economy—remained resilient, increasing at a 4.2% rate last quarter, up from 3.7% in the previous period.