Macro Pulse – US GDP (Q4 2024 – third estimate)

Exiting the fast lane

• The final GDP report for the fourth quarter is nothing more than a look in the rearview mirror. The US economy grew at a robust 2.4% annualized pace at the end of last year, but softer momentum in Q1 and a rapid deterioration in economic sentiment point to a notable slowdown in activity. While the economic engine is still running, there’s a non-negligible chance of negative real GDP growth in Q1 as an import surge – businesses front-loaded imports ahead of tariffs – will mechanically subtract from GDP. 
   
• The report offers a first look at the income side of the economy and showed that real Gross Domestic Income (GDI) rose a strong 4.5% in Q4, outpacing GDP growth. Gross Domestic Output (GDO) – the average of GDP and GDI, which is considered a more accurate measure of economic growth – grew at a robust 3.5% annualized pace, the strongest advance since Q4 2023.
   
• Today's report also reveals that corporate profits rose substantially in the fourth quarter to a new record high as faster productivity is keeping a lid on unit labor costs. Before-tax corporate profits rose by the most since Q2 2021, up $204b following a $15b decline in the prior quarter. And profit margins reached a new record high, up 0.5 percentage points (ppt) to 13.5% of GDP, suggesting that the corporate sector has some buffer to absorb rising costs from tariffs.
   
• Looking ahead, five key factors will contribute to slower economic activity in the coming months including slower disposable income growth, fading fiscal tailwinds, rising tariffs, higher interest rates, and surging policy uncertainty and market volatility. We expect real GDP to grow 1.7% in 2025 and 1.6% in 2026. While we don’t anticipate an outright pullback in activity, we see the odds of a recession in the next 12 months at about 40%. 
   
• We continue to anticipate two 25 basis point (bps) rate cuts by the Federal Reserve in 2025, in June and December. However, we shouldn’t get lulled into a false sense of Fed policy stability. A reactionary monetary policy stance means policy direction could rapidly turn more dovish on weaker economic and labor market data, just like it could turn hawkish with hotter inflation and inflation expectations readings.

Consumer spending grew an impressive 4.0% in Q4 – 0.2ppt below the prior estimate – following a robust 3.7% advance in Q3. Consumers stocked up on durable goods (cars, recreational goods and vehicles, and furniture) with outlays up a strong 12.4%, and spent freely on clothing. Services outlays also grew robustly, with consumers splurging on a wide range of services, including health care, entertainment, travel, hotel stays and dining.
 

Business investment growth was revised slightly higher to -3.0% annualized – still a notable pullback as it represents the largest decline in business investment since 2004 outside of a recession. Equipment investment was the main culprit, plunging 8.7% on a severe decline in transportation equipment and a sharp contraction in information processing equipment. Investment in intellectual property products was revised lower to show a 0.5% contraction, reflecting a contraction in R&D investment. A modest 2.9% annualized increase in structures outlays provided a mild offset. 
 

Residential investment rebounded 5.5% in Q4 following a 4.3% contraction in Q3. While the worst of the housing sector correction is behind us, the housing market is expected to stay stagnant, as slowing income growth and persistently high borrowing costs continue to limit demand. While proposed changes to the regulatory environment can help improve sentiment, elevated construction costs due to higher tariffs and supply-side challenges will constrain activity. 
 

Slower inventory accumulation led to a substantial 0.8ppt drag on real GDP growth, in line with the prior estimate. 
 

Net trade made a larger positive contribution to GDP growth in Q4 of 0.3ppt, as exports fell by 0.2% and imports fell 1.9%. With businesses front-loading imports ahead of tariff hikes, the trade deficit widened significantly at the start of the year amid an unprecedented surge in imports – particularly of gold – which is set to weigh heavily on Q1 GDP growth (imports subtract from GDP calculations).
 

Government spending growth was revised 0.2ppt higher to 3.1% – adding 0.5ppt to GDP growth – with federal spending up 4% and state and local outlays growing at a healthy 2.5% pace.
 

On the inflation front, price pressures firmed in Q4, with headline inflation rising 0.2ppt to 2.5% year over year (y/y) and core personal consumption expenditures (PCE) inflation rising 0.1pt to 2.8% y/y. Despite the idiosyncratic price bumpiness, economic fundamentals have been and remain disinflationary. Looking ahead, however, tariffs, confusion around trade policy and tighter immigration policy mean the risks to inflation are tilted to the upside.