U.S. Department of the Treasury

Introduction

Recent data indicate that U.S. economic growth slowed in the final quarter of 2024—reflecting in part the impacts of consecutive hurricanes in October as well as labor strikes.  Fourth-quarter data also suggest that labor markets have largely returned to balance, but headline and core inflation both ticked up.  Further moderation is needed before inflation is sustainably consistent with the Federal Reserve’s target.

Real Gross Domestic Product (GDP)

Real GDP growth slowed to 2.3 percent at an annual rate in the fourth quarter from the third quarter’s 3.1 percent pace.  Slower growth reflected a large drag from the change in private inventories, a volatile component.  By contrast, private consumption growth increased, and residential investment as well as government spending contributed to the quarterly expansion.  Private domestic final demand growth exceeded 3 percent for the second consecutive quarter (see Table 1 – Real Gross Domestic Product).  Over the four quarters of 2024, real GDP growth was 2.5 percent, moderating from 3.2 percent over the four quarters of the previous year.

Private domestic final purchases (PDFP)—composed of personal consumption expenditures (PCE), business fixed investment (BFI), and residential investment—measures the economy’s capacity to generate self-sustaining growth from domestic sources. PCE and residential investment growth each picked up in the fourth quarter, but BFI growth slowed, the latter due to a sharp swing in equipment investment from double-digit growth in the third quarter to a sizeable decline in the most recent quarter.  On balance, PDFP added 2.7 percentage points to topline real GDP growth in the fourth quarter, only modestly below the contribution of 2.9 percentage points in the third quarter. 

• Personal consumption expenditures (PCE) made the largest contribution to real GDP growth, rising 4.2 percent at an annual rate and adding 2.8 percentage points to headline growth.  The acceleration was driven by a large increase in durable goods spending, which alone contributed 0.9 percentage points to GDP growth.  The contribution from nondurable goods purchases was also solid, while services spending added 1.5 percentage points to growth with a notable increase in health care spending.

• Residential investment switched from a drag on growth for the past two quarters to a moderate impetus, rising 5.3 percent at an annual rate in the fourth quarter.  Within residential investment, single-family structures growth turned positive, while the other structures category continued to increase, boosted in part by a large gain in brokers’ commissions.
• Business fixed investment (BFI), the only component of PDFP to decline, fell 2.2 percent at an annual rate in the fourth quarter as equipment investment contracted for the first time in five quarters and investment in structures ticked down.  The drop in equipment investment, which subtracted 0.4 percentage points from GDP growth, likely reflected fewer completions of aircraft due to the Boeing labor strike, as well as a decline in information processing equipment investment.  However, investment in intellectual property products increased for the 18th consecutive quarter.

Of the other components of GDP, government spending and investment made a positive contribution to fourth quarter growth, while the change in private inventories subtracted from growth and net international demand was relatively neutral.  Public sector expenditures —with equal contributions rates between federal and state and local spending—added 0.4 percentage points to GDP growth.  The change in private net inventory investment posed the largest drag on real GDP growth, subtracting 0.9 percentage points in the fourth quarter. The net export deficit was little changed in the fourth quarter, with exports and imports making offsetting contributions to growth.

Labor Markets

Labor market data over the fourth quarter were largely favorable, despite a soft job growth report for October—which reflected labor strikes and severe hurricanes in the South. Given the back-to-back reports in November and December with over 200,000 jobs added per month, net hiring picked up in the fourth quarter while the unemployment rate ticked down.  One development that merits monitoring was the decrease in the prime-age (ages 25-54) labor force participation rate (LFPR) relative to the third quarter, though that LFPR remains on the higher end of readings since 2007 (see Table 1 – Labor Market Indicators).

• Total payroll job growth stepped up to an average of 170,000 jobs per month in the fourth quarter of 2024.  Despite strong job growth in the second half of 2024, hiring has slowed over the past several years: in 2021, employers added an average of 603,000 job per month during the initial recovery from the pandemic; each year since, the pace of job growth has decreased—to 377,000 in 2021, 251,000 in 2023, and 186,000 in 2024. 
• Like in recent quarters, job growth was largely focused in the public sector and in government-adjacent sectors, which accounted for 69 percent of average monthly job growth in the fourth quarter—compared to just 32 percent in the three years before the pandemic.
• During the latter half of 2024, the unemployment rate hovered just above 4.0 percent, a level near estimates by the Congressional Budget Office of the non-cyclical unemployment rate—or the rate of unemployment that is consistent with stable inflation and excludes fluctuations in aggregate demand.  In the fourth quarter, the average unemployment rate ticked down to 4.1 percent, which was its level in December. 
• Weekly unemployment insurance claims have remained near historically low levels for some time. During the fourth quarter, levels of initial and continuing claims moved higher temporarily, reflecting the labor market effects of multiple hurricanes.  By the end of the fourth quarter, however—as well as early in the current quarter—weekly readings of initial claims (or applications for benefits) had returned to levels in line with pre-pandemic readings, while the level of continuing claims (or approved and paid benefits) was less than 5 percent above levels just before the pandemic’s onset nearly five years ago.  Very recently, the California wildfires have likely contributed to higher claims.
• Labor force participation declined somewhat during the fourth quarter, but from relatively elevated levels.  After improving in the third quarter, the overall LFPR eased to an average of 62.5 percent of the population in December, only a tick below the average reading of 62.6 percent for the whole year.  While the LFPR among prime-age workers declined 0.4 percentage points from the third quarter to 83.5 percent on average in the fourth quarter, participation among this demographic remains relatively strong: December’s rate is only 0.5 percentage points below the 23-year high of 83.9 percent reached in July and August 2024. Notably, participation among those aged 55 or older remained stable at an average of 38.4 percent during the fourth quarter, after increasing to that rate in the third quarter. 
• Even with faster job creation and relatively strong rates of labor supply, some measures of labor demand continued to trend lower during the fourth quarter. At the end of September, job openings had stood near the lowest level since January 2021 and over the course of 2024, job openings declined by nearly 800,000, even with a small increase to a six-month high by the end of November.  The ratio of job openings (or vacancies) per unemployed worker increased slightly to 1.14 in November, up from 1.07 at the end of September.  Even so, both readings are below the pre-pandemic high of 1.24 and down by about one-half from the record high of 2.03 in March 2022.
• Looking ahead, according to the National Federation of Independent Business (NFIB) survey, small business optimism rose sharply in November and December to the highest level since 2018, leading to greater optimism about future hiring.  The net share of firms planning to increase employment rose to a 19-month high and are consistent with readings during the first Trump Administration before the pandemic.
• Nominal average hourly earnings for total private industry workers rose 3.9 percent over the year ending December 2024, modestly slower than the 4.3 percent pace from a year earlier.  Adjusted for inflation, real average hourly earnings were up 1.0 percent per month over the year ending in December, slightly faster than the year-earlier 0.9 percent pace.
• Real average hourly earnings growth appears similar for nonsupervisory workers, with wages rising 1.0 percent over 2024—slowing modestly from the year-earlier pace.  This pace of growth, however, may overstate the relative wage growth of production workers since it uses a deflator for average inflation, not one more specific to realized inflation by the income group.  Lower-income households feel inflation more acutely than do upper-income—in part because they can less easily substitute to lower-quality goods. 
• The alternative measure of wage growth—the Employment Cost Index (ECI), which is arguably a better measure as it adjusts for compositional changes of the workforce—continued to slow in the fourth quarter. The ECI for wages and salaries for private industry workers advanced 3.7 percent over the four quarters ending in December 2024, easing from the 4.3 percent gain over the four quarters through December 2023.  Nonetheless, this measure signals healthy, sustainable wage growth, given current productivity growth.

Inflation

After peaking in June 2022 at 9.1 percent, annual headline inflation as measured by the consumer price index (CPI) stood at 2.9 percent as of December 2024.  However, the average pace of monthly inflation has increased somewhat in recent quarters.  After rising an average 0.2 percent per month during the third quarter (2.1 percent at an annual rate), CPI inflation picked up again in the fourth quarter, reaching a monthly average of 0.3 percent (3.9 percent at an annual rate; see Table 2 – Inflation Indicators).

• CPI inflation for energy goods and services turned positive in the fourth quarter after falling in the prior two quarters. Monthly prices advanced 0.9 percent on average, following an average decline of 0.9 percent per month in the third quarter. 
• Monthly food inflation accelerated for the third consecutive quarter to 0.3 percent on average in the fourth quarter of 2024, the fastest quarterly average since the first three months of 2023.  Price levels for groceries remain higher than they were before the pandemic.  At the end 2024, there was a new wave of avian flu cases affecting commercial egg flocks in the United States, and recent cases have seen further spread into poultry flocks in the South and Southeast, raising the risk of additional price increases for eggs and related food products.

Monthly core CPI inflation in the fourth quarter matched the third quarter’s average pace of 0.3 percent but was above the second quarter’s 0.2 percent average.  On an annualized basis, core inflation picked up to 3.3 percent in the fourth quarter. The twelve-month core inflation rate in December was 3.2 percent, down from the peak rate in the autumn of 2022 but still well above a rate consistent with Federal Reserve’s target.

• After five consecutive quarterly declines, core goods prices increased 0.1 percent on average in the fourth quarter, continuing the uptrend that started towards the end of the third quarter.  Even so, core goods prices were still down 0.5 percent over the year ending December 2024.
• Significantly, inflation for rent of housing services (rent of primary residence and owners’ equivalent rent) slowed to an average of 0.3 percent per month in the fourth quarter.  This pace is below the 0.4 percent to 0.5 percent range that had largely persisted—save for two months—since May 2023. On an annual basis, rent of housing inflation was 4.7 percent through December 2024, the slowest rate since March 2022. Over the three years before the pandemic, inflation for combined rent of primary resident and owners’ equivalent rent averaged 3.3 percent per year. 
• Inflation for non-housing core services was stable in the fourth quarter, remaining at an average 0.3 percent growth per month. Stability in core non-housing services inflation largely reflected a relative slowing in medical care price inflation as well as slower growth in prices for motor vehicle insurance and repairs. From 2017 to 2019, annual non-housing services inflation averaged 2.2 percent, versus 4.0 percent this last year. 

Inflation as measured by the PCE price index has notable differences in weights and methodologies versus the CPI. Over the past 20 years, twelve-month CPI inflation has exceeded PCE inflation by about 0.4 percentage points on average. On a fourth quarter over fourth quarter basis, PCE inflation slowed from 2.8 percent in 2023 to 2.4 percent in 2024, while core inflation eased from 3.2 percent to 2.8 percent.  Nonetheless, inflation by this measure remains above the Federal Reserve’s 2 percent target and picked up somewhat on a quarterly basis at the end of 2024.

Risks to the Outlook

Business optimism: The aim of the Administration’s pro-growth economic platform is to usher in a new economic golden age, a sustained economic expansion that will create more jobs, wealth, and prosperity for all Americans. A first step in achieving this is restoring the faith of the private sector. Under the previous administration, businesses felt limited by the Administration’s bad policies. Until the November election from 2021 to 2024, small businesses had the most pessimistic expectations about economic growth on record, even more depressed than during the anemic, post-global financial crisis recovery of the Obama administration.  Since President Trump’s re-election, however, small business sentiment has rebounded, with the National Federation of Independent Businesses optimism index jumping by 12 percent, signaling their trust in the Administration’s pro-growth agenda.  Moreover, more small businesses are now saying that now is a good time to expand and that they want to invest in America, presaging tailwinds to economic growth as the private sector leads, rather than the government.

Labor markets: While labor markets appear healthy in aggregate, there are some data that should be watched.  Hiring, for example, has slowed.  The hires rate averaged just 3.4 percent over the past six months. That is a low level for an expansion, comparable to the rates observed in the slow-recovery period of 2013. Before the recessions of 2001 and 2008, a decrease in the hires rate was a pronounced indicator of future labor weakness.  The decreasing hires rate also predated an increase in the layoffs rate.  Currently, layoffs remain low: the layoffs rate has held between 1.0 and 1.1 percent since April 2023 (the pre-pandemic low was 1.1 percent) and the quits rate has returned to a normal range—but, given the low level of the hires rate, a spike in the layoffs rate would likely signal net job losses. 

Another area of concern is the heavy concentration of private-sector job growth over the past year. Although U.S. labor markets added 1.8 million private-sector jobs in 2024, three sectors (health and social assistance, construction, and leisure and hospitality) accounted for 81 percent of that growth—well exceeding their share of jobs (38 percent).  Together, employment in these industries rose by 1.5 million (2.9 percent) over the year. Employment in all other private-sector industries increased by only 0.3 million (0.4 percent) in 2024, and three sectors contracted (mining and logging, manufacturing, and information).  This degree of concentration is highly unusual relative to pre-pandemic years, and returning to broadly based, private sector driven job growth would improve the vibrancy of the U.S. economy.

Household finances: In aggregate, households appear to be in a solid financial position--supported by wealth gains and rising real wages.  However, some data suggest that financial health is greater among those who hold assets versus those who do not.  The increase in household assets since the end of 2019 through the third quarter of 2024 (last available data) has been driven by real estate appreciation and growth of equities, money market fund shares, and mutual fund shares.  Roughly 70 percent of the increase in assets over the past five years has been due to these four categories. 

Meanwhile, the data suggest lower-income households may be growing more financially strained.  These households are more likely to carry credit card debt than higher-income households.  The total balance of credit card debt has risen by 51 percent since early 2021 and now stands $240 billion higher than just before the pandemic.  The recent sharp increase suggests that lower-income households’ reserves have been exhausted, and they may be borrowing to finance consumption. 

This highlights a growing concern over the past two years that is suggestive of lower-income financial strain—rising rates of seriously delinquent credit card debt (90 days or more overdue).  Since early 2023, the rate of serious delinquency has risen by 3.5 percentage points to 11.1 percent in the third quarter of 2024, the highest reading in twelve years.  Moreover, transition rates from delinquent (30 or more days past due) to seriously delinquent have also been rising.  A shock to the economy makes the financial situation of lower-income households more precarious.  By widening the base of who benefits from economic growth, the economy becomes more resilient and better able to weather temporary economic fluctuations.

Inflation: Although inflation has fallen from the highs of mid-2022, the final mile of inflation moderation to the Federal Reserve’s target may prove slow: goods prices are unlikely to provide disinflationary pressures for much longer, housing inflation is only slowly easing, and price growth for core services excluding housing remains elevated.  Since high inflation is felt more acutely by lower-income households more than by upper-income—in part because they can less easily substitute to lower-quality goods—getting inflation sustainably to the Federal Reserve’s target is essential to achieve the widespread prosperity envisioned by the President.

Conclusion

Although data have suggested American economic resilience, the economy largely has been propped up by government largesse.  While labor markets appear strong, job growth has been predominantly limited to industries subsidized by the public sector.  Moreover, prosperity has not been broadly shared, and inflation remains too high—particularly for lower-income households who are worse off now than they were before the pandemic.  Supply-side expansion is necessary to bring down inflation sustainably and to make Americans less vulnerable to global inflation, supply-chain disruptions, and geopolitical events.  As the Administration implements its agenda of slashing regulations, lowering the joint burdens of high inflation and high taxes, and freeing capital by reducing federal deficits, the private sector is primed to be the driving force of the next great economic expansion.

Table 1 - Real Gross Domestic Product

Source. Bureau of Economic Analysis, Gross Domestic Product (Advance Estimate), Fourth Quarter 2024.

Table 2 - Labor Market Indicators

Sources. Bureau of Labor Statistics, The Employment Situation - December 2024; Job Openings and Labor Turnover - November 2024.

Table 3 - Inflation Indicators

Sources. Bureau of Labor Statistics, Consumer Price Index - December 2024. Bureau of Economic Analysis, Personal Income and Outlays, December 2024.

¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from CPI Data.