GDP GROWTH: TRENDING IN Q4 2024
The U.S. economy slowed in the fourth quarter but still turned in a healthy 2.8% growth rate for the
year, compared to 2.9% in 2023. Growth in 2024’s GDP reflected increases in consumer spending,
investment, government spending and exports.

The fourth quarter expanded at an annualized rate of 2.3%, as measured by gross domestic product.
That was off from the 3.1% GDP increase in the third quarter and slightly below the expectations of
many economists who predicted a 2.4% gain. “Fourth-quarter GDP data capped off a surprisingly
strong year in 2024. The U.S. consumer has been unstoppable, supported by wealth creation, a strong
labor market and lending,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth
Management.

There are few concerns about economic growth this year. The key uncertainty lies in whether proposed
tariffs and expansionist policies by the new administration in Washington, D.C., will fan the embers of
inflation, burden consumers with higher prices and prevent the Federal Reserve from lowering interest
rates. The increase in real GDP in the fourth quarter primarily reflected increases in consumer and
government spending that were partly offset by a decrease in investment. Spending on imports, a
subtraction in the calculation of GDP, fell 0.8% from 10.7% in Q3, the biggest drop in six quarters.

Consumer spending accelerated to an annual rate of 4.2% in the fourth quarter, up from the prior quarter’s 3.7%. Spending both on goods and services gained steam in that period, especially purchases of durables, which registered a surprising 12.1% rate, the most since early 2023.

The pick-up in spending on durable goods — products meant to last at least three years such as furniture and cars — may have been due to shoppers buying ahead of the Feb. 1 scheduled imposition of tariffs of 25% on goods from Mexico and Canada. Lower short-term interest rates also may have moved consumers to buy more durables. Nonresidential fixed investment contracted at an annual rate of 2.2% in the fourth
quarter, down sharply from the 4% gain in Q3.

“We ended on a pretty strong note,” said Diane Swonk, chief economist at KPMG. “It’s stunning how resilient and strong the economy has been.” Compared to the third quarter, the deceleration in real GDP in the fourth quarter primarily reflected the downturns in investment and exports.

The price index for gross domestic purchases increased 2.2% in the fourth quarter, compared with an increase of 1.9% in the third quarter. The personal consumption expenditures index was up 2.3%, compared with an increase of 1.5%. Excluding food and energy prices, the PCE price index increased 2.5%, compared with a third-quarter increase of 2.2%.

The price index for gross domestic purchases increased 2.3% in 2024, compared with an increase of 3.3% in 2023. The PCE price index increased 2.5%, compared with a Q3 increase of 3.8%. Excluding food and energy prices, the PCE price index increased 2.8%, compared with Q3’s gain of 4.1%.

EMPLOYMENT: TRENDING IN Q4 2024
The U.S. economy delivered a strong finish to 2024, adding 256,000 jobs in December for the largest
increase since March. November 2024’s job gains were revised down by 15,000 to 212,000, while 7,000
added jobs in October raised the month’s revised total to 43,000.

The increase was greater than the Dow Jones consensus forecast of 155,000 jobs. The unemployment rate
unexpectedly ticked down to 4.1% from 4.2%.

Notably, wage growth does not appear to be re-accelerating. Year-over-year wage growth for the private
sector came in at 3.9%, roughly where it has been for three consecutive months. These and other key factors show the economy is operating at strength. There were about 2.2 million jobs added in 2024, a monthly average of 186,000 in line with annual totals from 2017 to 2019.

Job growth came from the familiar sources of health care, which gained 46,000 positions, followed by
43,000 leisure and hospitality jobs and 33,000 added to government payrolls.

Retail trade added 43,000 jobs in December, following a loss of 29,000 jobs in November. In December,
employment increased in clothing, clothing accessories, shoe, and jewelry retailers (+23,000); general
merchandise retailers (+13,000); and health and personal care retailers (+7,000). Building material and
garden equipment and supplies dealers lost jobs (-11,000). Overall, employment in retail trade changed little in 2024, following an average monthly increase of 10,000 in 2023. At their December meeting, Federal Reserve officials deemed the labor market mostly healthy though slowing. The Fed
voted at the meeting to lower its key borrowing rate by a quarter percentage point while signaling a slower pace of reductions ahead. “The bottom line is the economy is in a good place. But, as markets expected, central bankers left rates unchanged in their January Meeting. It’s growing very strongly. The labor market is at full employment,” said St. Louis Fed President Alberto Musalem in an interview after the jobs report. Musalem also cautioned that the pace of the interest rate reductions “has to be patient and careful and very dependent on the outlook.”

The U.S. economy has now added jobs for 48 months in a row, tying the second-longest period of employment expansion on record since 1939. Health care added 46,000 jobs in December, with 15,000 new positions in home health care services, 14,000 nursing and residential care facilities jobs
and 12,000 in hospitals. Health care added an average of 57,000 jobs per month in 2024, the same as the average monthly gain in 2023. Retail trade added 43,000 jobs in December, following a loss of 29,000 jobs in November. In December, employment increased in clothing, clothing accessories, shoe, and jewelry retailers (+23,000); general merchandise retailers (+13,000); and health and personal care retailers (+7,000).

Building material and garden equipment and supplies dealers lost jobs (-11,000). Overall, employment in retail trade changed little in 2024, following an average monthly increase of 10,000 in 2023. Government employment continued to trend up in December (+33,000). Government added an average of 37,000 jobs per month in 2024, below the average monthly gain of 59,000 in 2023.

MONETARY POLICY: TRENDING IN Q4 2024
After cutting the federal funds target interest rate by a half point in September the Fed’s Open Market
Committee lowered the overnight bank rate another 50 basis points in the fourth quarter to 4.25%
to 4.50%. But policymakers signaled that lingering inflation and strong economy have forced a
recalibration of rate-cut plans for 2025, scaling back the number of planned reductions from four to
two.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” said Fed
Chair Jerome Powell after the December meeting, telling the New York Times: “The U.S. economy is
just performing very, very well, substantially better than our global peer group.”

Since earlier in the year, labor market conditions have generally eased, and the unemployment rate
has moved up but remains low, Powell said. Inflation has made progress but remains somewhat
elevated. Powell said the central bank’s policy “is now significantly less restrictive. We can therefore be
more cautious as we consider further adjustments to our policy rate.”

The Fed held rates at 5.25% to 5.50% from July 2023 to September 2024. Between March 2022, when
rates were near zero, and July 2023 the Fed raised rates 11 times.

Along with the latest interest rate cut, the Fed continues, as it has since 2022, reducing its balance sheet of fixed income assets. At its peak, the Fed’s balance sheet grew to nearly $9 trillion dollars. Each month, the Fed trims its Treasury bond holdings, which now have declined to approximately $6.9 trillion.

“It seems unlikely the Fed will drop its balance sheet back to the $4 trillion level, as it stood in 2015-16, but given the extent the economy has grown since then, a larger Fed balance sheet may be justified,” said Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.

After December 2024’s meeting, the FOMC issued its Summary of Economic Projections, reflecting each FOMC member’s forward view on key economic variables. The Fed’s projections suggest most major economic measures are expected to show little change in 2025.

“The Fed is seeing a lot of what they want in terms of economic data,” Haworth said. “Inflation in general is slowing, except for recent upticks in food and energy, which are considered transitory. The job market remains healthy as well.” The Fed’s aim in boosting rates and keeping them elevated was to throttle the highest rate of inflation in forty years. At its peak, inflation, as measured by the Consumer Price Index, reached 9.1% for the 12 months ending in June 2022. The most recent CPI reading, for the 12 months ending in November 2024, showed inflation at a much improved 2.7%. However, over the most recent months, inflation moved modestly higher.

“There is a risk of a reacceleration of inflation,” Haworth said, adding, “The potential for added tariffs under the new Trump administration could add to that risk.”

GLOBAL ECONOMY: TRENDING IN Q4 2024
Global economic growth closed the year holding steady at 3.2% and is projected by the International
Monetary Fund to gain 0.1 percentage point in 2025.

The IMF’s World Economic Outlook Update said the expected improvement was less than predicted after
disappointing data releases in some Asian and European economies.

Growth in China, at 4.7% year over year failed to meet expectations. Faster-than-expected net export
growth only partly offset a faster-than-expected slowdown in consumption amid delayed stabilization in the property market and persistently low consumer confidence, the IMF said. Growth in India also slowed more than expected, led by a sharper-than-expected deceleration in industrial activity. Growth continued to be subdued in the euro area (with Germany’s performance lagging that of other euro area countries), largely reflecting continued weakness in manufacturing and goods exports even as consumption picked up in line with the recovery in real incomes. In Japan, output contracted mildly owing to temporary supply disruptions.

The IMF noted that momentum in the United States remained robust with the economy expanding at a rate of 2.7% year over year in the third quarter, powered by strong consumption.

Global disinflation continues, but there are signs that progress is stalling in some countries and that elevated inflation is persistent in a few cases. Global headline inflation is expected to decline to 4.2% in 2025 and 3.5% in 2026. The global median of sequential core inflation has been just slightly more than 2% recently. Nominal wage growth shows signs of moderation along with continued normalization in labor markets.

Although core goods price inflation has fallen back to or below trend, services price inflation is still running above pre–COVID-19 averages in many economies, most notably the United States and the euro area. Pockets of elevated inflation also persist in some emerging market and developing economies in Europe and Latin America.

Policy-generated disruptions to the ongoing disinflation process could interrupt the pivot to easing monetary policy with implications for fiscal sustainability and financial stability, the IMF said. Where inflation is proving more sticky, central banks are moving more cautiously in the easing cycle while keeping a close eye on activity and labor market indicators as well as exchange rate movements. A few central banks are raising rates, marking a point of divergence in monetary policy.

Global financial conditions remain largely accommodative. Equities in advanced economies have rallied on expectations of more business friendly policies in the United States. In emerging market and developing economies, equity valuations have been more subdued, and a broad-based strengthening of the US dollar, driven primarily by expectations of new tariffs and higher interest rates in the United States, has kept financial conditions tighter. In the United States, underlying demand remains robust, reflecting strong wealth effects, a less restrictive monetary policy stance and supportive financial conditions. IMF staff projections included assumptions based on a looser fiscal policy in the United States, Driven by new
expansionary measures such as tax cuts, U.S. could see a boost in economic activity in the near term with small positive spillovers onto global growth.