The U.S. economy showed signs of slowing in the final quarter of 2024, with GDP growth coming in below expectations. According to the latest report from the Commerce Department, the U.S. economy grew at an annualized rate of 2.3% in Q4, which was less than the 2.5% increase that economists had forecasted. This marks a slight deceleration from the 3.1% growth seen in the third quarter.

Despite this slowdown, the U.S. economy demonstrated solid growth for the year as a whole, with GDP increasing by 2.8% in 2024, just slightly lower than the 2.9% growth in 2023. The Q4-to-Q4 comparison showed a 2.5% increase, confirming a steady, albeit slower, pace of expansion.

Mike Reynolds, vice president of investment strategy at Glenmede, noted that the economic expansion remained firmly on track, driven largely by strong consumer spending. "As goes the consumer, so goes the broader economy," he commented. Indeed, consumer spending, which accounts for roughly two-thirds of all economic activity, surged by 4.2% in Q4. Despite facing persistent inflation pressures, households continued to spend robustly, contributing to the overall strength of the economy.

The report highlights the ongoing challenge of inflation, with prices still elevated across a wide range of goods and services, from housing to food. However, inflation has cooled significantly since its peak in mid-2022, easing some pressure on consumers. The growth in consumer spending was supported by this relative deceleration, but households—especially those with lower incomes—continue to feel the strain of higher costs.

Government spending also played a role in bolstering the economy, rising by 3.2% in Q4. However, trade was a drag on the overall growth, as both exports and imports fell by 0.8%, contributing negatively to GDP. Additionally, private domestic investment saw a sharp decline of 5.6%, subtracting more than a percentage point from the overall growth rate. A slowdown in inventories also contributed to the downward revision of Q4's growth.

In a separate report on Thursday, the Labor Department showed a significant drop in initial unemployment claims, which totaled 207,000 for the week ending January 25, a decrease of 16,000 from the previous week. This drop was well below expectations and suggests continued strength in the job market. Continuing claims, which are reported with a one-week delay, also fell, down 42,000 to 1.86 million.

The resilience of the labor market and the ongoing deceleration of inflation have given the Federal Reserve room to adopt a more patient approach to monetary policy. Despite cutting interest rates by a full percentage point in the final months of 2024, the Fed has signaled that aggressive rate cuts are unlikely in the near future. In a recent meeting, Chairman Jerome Powell emphasized that the central bank is in no rush to ease monetary policy further, reflecting confidence in the economy's ongoing recovery.

However, the report also raised concerns about the persistence of inflation. The chain-weighted price index, which adjusts for consumer substitutions between goods, increased by 2.2% in Q4, slightly above the 1.9% increase seen in the third quarter but lower than the anticipated 2.3%. Although inflation is cooling, the data also suggests that consumers are increasingly dipping into their savings to support their spending, with the personal saving rate falling to 4.1%—its lowest level in two years.

As we close out 2024, the U.S. economy presents a mixed picture: growth continues but at a slower pace, and while inflation has moderated, it remains a burden for many households. The trajectory of economic growth in 2025 will depend on whether consumer spending can continue to fuel the expansion while inflationary pressures remain manageable.