US Economic Growth Almost Slowed to an Emerging Stage in the Fourth Quarter
US economic growth may have slowed to a solid level in the fourth quarter due to disruptions from last year’s government shutdown and moderation in consumer spending, although tax cuts and investment in artificial intelligence were expected to boost activity this year.
An expected decline in gross domestic product will follow a quarter of strong growth. The Commerce Department will publish on Friday its preliminary estimate of fourth-quarter GDP, delayed by the 43-day government shutdown.
The report is expected to highlight the rise of unemployment and the “K-shaped” economy, where high-income households are doing well while low-income consumers are struggling amid inflation from imports and stagnant wage growth. Those conditions have created what economists and opponents of President Donald Trump call an affordability crisis.
“We’re going to end the year on a strong note in terms of growth, but it doesn’t really translate to feeling as good as it looks on paper for most Americans,” said Diane Swonk, chief economist at communications firm KPMG.
GDP likely to increase by 3.0%: survey
GDP likely increased at a record annual rate of 3.0% last quarter after slowing to a 4.4% pace in the July-September quarter, a Reuters poll of economists predicted. However, the survey was completed ahead of data on Thursday showing the trade deficit rose to a five-month high in December.
The second straight monthly decline in the trade deficit led the Atlanta Federal Reserve to cut its GDP estimate to 3.0% from 3.6%.
The nonpartisan Congressional Budget Office estimated that the government shutdown would shave 1.5 percentage points off fourth-quarter GDP through fewer services provided to government workers, lower federal spending on goods and services and a temporary reduction in Nutrition Assistance Program benefits.
The CBO estimated that a significant decrease in GDP would eventually be realized, although between $7 billion and $14 billion would not be. Economists estimate that the economy will grow by 2.2% in 2025 after growing by 2.8% in 2024. Only 181,000 jobs were added last year, the fewest outside of the pandemic since the Great Recession of 2009, and down from 1.459 million in 2024.
“You have a combination of shocks affecting the American economy,” said Gregory Daco, chief economist at EY-Parthenon. “On the one hand you have a drag on higher prices, tariffs, trade restrictions and reduced immigration, but you’ve also improved from AI investment and continued strong momentum in terms of stock prices that support continued spending by wealthy consumers.”
Growth in consumer spending is likely to have slowed
Consumer spending growth is expected to slow from the third quarter’s brisk 3.5% pace. Economists say spending has been largely driven by high-income households and at the expense of savings as inflation erodes purchasing power.
“Affluence is one thing, but many households rely on disposable income to pay off debt, and disposable income has stagnated significantly this quarter,” said Sal Guatieri, chief economist at BMO Capital Markets.
Consumer spending may get a boost from what economists expect to be a big tax return this year due to tax cuts. A strong pace of business investment is expected, especially related to AI. The jump in imports in December was partly driven by capital goods, particularly computer accessories and telecommunications equipment amid advances in data center construction to enable AI.
That should remove any drag on GDP growth from trade.
Economists estimate that AI, including data centers, semiconductors, software and research and development, will account for a third of GDP growth in the first three quarters of 2025, dwarfing tax cuts and reducing immigration.
“It is a tangible contribution from a sector that used to represent a small part of the economy,” said Daco from EY-Parthenon. “It’s also an important source of trade data consistency, because a lot of what we build here and what we do goes into foreign countries.”
Economists estimate that trade is making little or no contribution to GDP after helping to boost growth for two straight quarters. Inventories were another wildcard, pulling out of GDP for two consecutive quarters.
Residential investment is expected to contract for the fourth quarter in a row as builders and homebuyers struggle with higher borrowing costs.
The old report will have no impact on monetary policy. But Federal Reserve officials may be looking at inflation data for December, which should be released at the same time as the GDP report.
Economists polled by Reuters forecast PCE inflation, excluding the volatile food and energy components, rising 0.3%. Core PCE inflation rose 0.2% in November from the previous month. Core PCE inflation is expected to rise 2.9% year over year after rising 2.8% in November. The US central bank has an inflation target of 2%.
“The year-on-year growth rate shows no improvement from mid-2024,” said Lou Crandall, chief economist at Wrightson ICAP. “Most Fed officials expect at least some improvement in the coming months, but they will want to see that show up in real numbers.”
(Editing by Rod Nickel)
