Biggest consumer spending surge in nearly two years overpowered the drop in private domestic investment and change in private inventories.
By Wolf Richter for WOLF STREET.
Our drunken sailors, as we’ve come to call them lovingly and facetiously, had a blast at the party in Q4. Consumer spending jumped by an annualized rate of 4.2% in Q4, adjusted for inflation, the biggest increase since Q1 2023.
They splurged massively on goods, especially motor vehicles and recreational goods, and they also splurged on services, and they accounted for over 69% of GDP.
And their massive spending propped up GDP growth despite the drop in private domestic investment and the drag posed by the change in private inventories.
GDP, adjusted for inflation (“real GDP”), grew by an annualized rate of 2.3% in Q4, compared to growth rates of 3.1% in Q3, 3.0% in Q2, and 1.6% in Q1, according to the Bureau of Economic Analysis today.
By major category, adjusted for inflation, in annual rates:
- Consumer spending (69% of GDP): +4.2%, a sharp acceleration from the prior quarters, fastest growth since Q1 2023. It contributed 2.82 percentage points of the 2.3% GDP growth!
- Gross private domestic investment (18% of GDP): -5.6%, after six quarters of increases. It subtracted 1.03 percentage points from GDP growth.
- Government consumption and investment (17% of GDP): +2.5%, a deceleration from the prior two quarters (federal government +3.2%, state and local government +2.0%). It contributed 0.42 percentage points to GDP growth.
- Change in private inventories dragged on GDP. This form of investment subtracted 0.93 percentage points from GDP growth.
- Net Exports (Exports minus Imports): Roughly unchanged at near record levels. Imports drag on GDP. Exports add to GDP.
Annual “real” GDP for the whole year 2024 (inflation adjusted, but not seasonally adjusted, and not an annual rate) grew by 2.8%, driven by consumer spending, which also grew by 2.8%.
This annual real GDP growth of 2.8% was well above the 15-year average growth of 2.4%, despite the highest interest rates the economy faced in decades, with short-term rates above 5.4% for much of the year.
A purer indicator of private domestic demand: “Final sales to private domestic purchasers” is a metric that is part of the GDP report and tracks US private domestic demand ( = GDP less exports, less imports, less government consumption expenditures, less government gross investment, less change in private inventories). It covers about 87% of GDP.
Powell mentioned it from time to time as a purer indicator of private domestic demand from consumers and businesses – which is what monetary policy is trying to influence.
Adjusted for inflation, final sales to private domestic purchasers jumped by an annual rate of 3.2% in Q4, attesting to the strength of private domestic demand:
The actual size of the US economy: “Current-dollar” GDP, or “nominal” GDP (not adjusted for inflation and expressed in current dollars) rose by an annual rate of 4.5% in Q4, to $29.7 trillion. This is the amount we use for the US debt-to-GDP ratio here further down.
Consumer spending jumped by an annual rate of 4.2% in Q4, adjusted for inflation, the fastest growth since Q1 2023, and the second fastest since Q4 2021, powered by a huge splurge on durable goods, especially motor vehicles and recreational goods and vehicles.
- Services: +3.1%.
- Durable goods: +12.1%
- Nondurable goods: +3.8%.
This spending splurge on goods has been predicted by retail sales – which are sales of goods, not services – that have caused us to warn, The Fed Needs to Watch Out: Amid Strong Demand from our Drunken Sailors, Retail Sales Surged in Late 2024 and Inflation Caught its Second Wind.
Quarter to quarter, in terms of 2017 dollars, personal consumption expenditures, as they’re called officially, jumped by $167 billion, to an annual rate of $16.3 trillion in Q4.
Gross Private Domestic investment dropped by 5.6% annualized and adjusted for inflation, after six quarters of increases. That was a big hit to GDP, subtracting 1.03 percentage points from GDP growth. Of which:
- Nonresidential fixed investments: -2.2%:
- Structures: -1.1%
- Equipment: -7.8%
- Intellectual property products (software, movies, etc.): +2.6%.
- Residential fixed investment: +5.3%.
Government consumption expenditures and gross investment rose by 2.5% annualized and adjusted for inflation, the smallest increase since Q1.
Combined, federal, state, and local government consumption and investment accounts for 17% of GDP. State and local governments account for 61% of total government spending, the federal government accounts for 39% total government spending.
This does not include interest payments, and it does not include transfer payments (the biggest part of which are Social Security payments), which are counted in GDP if and when consumers and businesses spend these funds or invest them in fixed investments.
- State and local governments: +2.0%.
- Federal government: +3.2%.
- National Defense +3.3%.
- Nondefense +3.1%.
The Trade Deficit (“net exports”) in goods & services remained at near record-high levels, essentially unchanged overall:
- Exports: -0.8% (goods exports -5.0%, services exports +7.2%). Exports subtracted 0.08 percentage points from GDP growth.
- Imports: -0.8% (goods imports -4.0%, services imports +12.8%, driven by Americans spending overseas in the ongoing travel boom). Lower imports contributed 0.12 percentage points to GDP growth.
- Net exports (exports minus imports) remained at -$1.07 trillion.
The Debt-to-GDP ratio worsened to 121.8% in Q4 as the gross national debt in current dollars (not adjusted for inflation) ballooned by 2.0% from the prior quarter to $36.2 trillion, while current-dollar GDP (not adjusted for inflation) grew 1.1% to $29.7 trillion.
The spike in 2020 occurred as GDP collapsed during the lockdown while the gross national debt jumped on the government’s free-money-giveaway spree.
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I always enjoy your articles. Kudos on the data gathering.
Did the Boeing strike even register in the numbers?
Apparently not. It registered in the jobs numbers at the time. But it’s not like these workers on strike stopped spending.
However, the BEA added this comment about Hurricane Milton:
“Impact of Hurricane Milton on fourth-quarter 2024 estimates
Hurricane Milton made landfall as a Category 3 hurricane just south of Tampa Bay, Florida, on October 9, 2024, bringing damage from high winds, including significant tornado activity, and extensive inland flooding.
This disaster disrupted usual consumer and business activities and prompted emergency services and remediation activities. The responses to this disaster are included, but not separately identified, in the source data that BEA uses to prepare the estimates of GDP; consequently, it is not possible to estimate the overall impact of Hurricane Milton on fourth-quarter GDP. The destruction of fixed assets, such as residential and nonresidential structures, does not directly affect GDP or personal income. BEA estimates of disaster losses are presented in NIPA table 5.1, “Saving and Investment.” BEA’s preliminary estimates show that Hurricane Milton resulted in losses of $27.0 billion in privately owned fixed assets ($108.0 billion at an annual rate) and $3.0 billion in state and local government-owned fixed assets ($12.0 billion at an annual rate).“
A lot of people pulled their purchasing forward in anticipation of tariffs and rising cost of goods, I know we did a little.
For January, the threat of a Costco strike has the stores packed to the rafters with people stocking up. On Saturday afternoon ours was like trying to go to the mall on Christmas Eve.
MW: Why the Fed may be done cutting interest rates, once and for all.
Even if the Fed cut the rates it can, wouldn’t the bond vigilantes at this point push back? If that makes sense, who wins that tug-of-war?
Given the “interesting” nominations coming from our new leadership, I can’t wait to see who — or what — is nominated for the next Fed chair. Maybe a ham sandwich that got un-indicted at some point?
Wolf, I saw a stat that I was curious what you make of.
Nominal GDP; +1.4 Tril , +4.9% YoY
Treasury Debt outstanding ; ++2.2 Tril, +6.4% YoY
1. You’re comparing apples and oranges and get BS.
2. A lot of the money that government borrows and spends doesn’t go into GDP, including interest payments.
3. I discussed some of that in the article.
4. Including the debt-to-GDP ratio, which shows the burden of the debt on the economy.
5. Don’t drag trash that you pick up on the internet into here. Instead, RTGDFA
Wolf, you need to coach Powell on “How to handle stupid questions “.
Slick, lol, wouldn’t that be great!
Powell……BS..LTMGDFS!!
I still think he should be given a special Taser to zap reporters that ask stupid, repetitive, leading, loaded, and manipulative questions. ZZZZAPPP, “Next.”
That’s hilarious. I could just see some fool reporter yelling “Don’t tase me, bro!”
This maybe an easily answered question and I’m just not thinking atm.
But if over the “bad years” of Covid the fed decided to print money to assist the economy, thus creating the “good years”. Following that we had terrible inflation.
What was the ultimate brass tax damage versus if Covid never happened (and we continuing on the normal trajectory we were on)? Can we get a dollar amount figure of the damage? Or just history may show us later.
I mean there has been a lot of damage. Obviously
Fed funds rate at 4.3% is a stimulus for big savers. It is for me anyway. I have lots more money to spend from interest alone compared to almost nothing a few years ago. If the Fed drops the rate below 4% I’ll shift to 20 year bonds which will then be yielding over 5%. I am okay with 4.3%, but I would be happy with 5%, very happy at 6%. Frankly, I am thinking about moving some to 20 years right now.
“Fed funds rate at 4.3% is a stimulus for big savers.”
It’s a stimulus for those who already have assets in general.
Whats the multiplier effect of domestic funding? I suspect that the lion’s share of those dollars go to China companies. What a pity we no longer have much of a base economy.
What do you think is the primary reason for a fall in domestic investment? If the demand is booming, why is there a pull-back in investment? What do corporations see in the future?
Slowing QT was defacto QE.
Can anyone be surprised the “Zero Fox” contingency are still on a spending spree???
Powell for Dog Catcher!
The coming shock and awe of a reciprocal trade war with all our North American neighbors might have a moderating effect on spending….at least for spending which is largely discretionary.
All this talk about tariffs is like tossing a grenade into the outhouse. It’s likely to get messy.
I’m a mystery shopper…its a mystery why I shop