US economy is chugging along nicely

The US economy grew by 2.3% in the fourth quarter of 2024.

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Dr. Christoph Balz, Bernd Weidensteiner

Commerzbank Economic Research

01/30/2025

This is slightly less than expected, but still above average. Private consumption, in particular, drove growth. We see this as confirmation of our assessment that the US economy is expanding strongly despite relatively high key interest rates because financing conditions as a whole are still quite favorable.

Data: In the fourth quarter, the US economy grew by 2.3% (this and all subsequent growth rates are annualized rates of change from the previous quarter). This was less than the consensus of economists had expected (2.6%), but exactly in line with our forecast.

Details: Growth was particularly driven by private consumer spending (+4.2%). Government spending (+2.5%) also provided support. The picture for investment was mixed. Residential construction expanded for the first time since the first quarter (+5.3%), presumably benefiting from the fall in mortgage rates through September. Companies also invested more in software and other intellectual property rights (+2.6%), but less in machinery and other equipment (-7.8%). Nonresidential construction also shrank (-1.1%).

GDP growth would have been even better if the smaller inventory build-up had not pushed growth down by 0.9 percentage points.

Interpretation: At first glance, the growth of the US economy in the fourth quarter is somewhat disappointing, falling short of the gains of around 3% in each of the previous two quarters. However, this was because companies this time took a larger share of the products they sold from inventory and did not produce them in the fourth quarter. This should be a one-off effect.

Accordingly, we rate the report somewhat better than the first impression suggests. In any case, it makes sense to look at private domestic final purchases, i.e. gross domestic product excluding inventory investment, government and foreign trade. Federal Reserve Chairman Powell has repeatedly emphasized this variable because it provides a clearer signal of the trend in demand. In the fourth quarter, there was a strong increase of 3.2%, similar to the previous quarters.

We therefore continue to expect robust GDP growth of 2.3% in 2025, which is higher than the consensus estimates of potential growth (the Fed sees this trend growth at 1.8%). While policy interest rates are quite high, the economy benefits from overall financing conditions in the economy remaining favorable given record high equity valuations and low risk premia.

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