US GDP disappoints – but consumers power on. Meanwhile, Europe stagnates

The US economy grew at a slower-than-expected pace in the last quarter of 2024, expanding at a 2.3% quarter-on-quarter annualized rate. That trailed the 2.6% consensus estimate.

However, markets mostly took the GDP report as a sign of strength. That's because of the seemingly unstoppable US consumer, as our first chart demonstrates. Personal consumption expenditure (PCE) contributed 2.8% points to the growth rate, the most since the first quarter of 2023.

Such robust consumption – which accounts for the bulk of the American economy – also gives some context for the Federal Reserve's decision to keep its key rate unchanged this week.

The PCE component itself grew by 4.2% in Q4; durable goods consumption jumped by 12.1% – the first double-digit growth pace since early 2023. The durable-goods category includes motor vehicles and recreational goods, and such big-ticket purchases tend to indicate Americans feel optimistic about their future financial situation.

What dragged down GDP, then? A slower pace of inventory accumulation and investment were the main negative factors, each subtracting a full percentage point from growth. According to some interpretations, businesses were selling durable goods out of inventory to accommodate the surging consumer demand – signaling potential for further economic strength when those inventories are rebuilt. The investment decline could be related to uncertainty about policy changes given the change in US administration, as well as a strike at Boeing.

The broad US strength contrasts with persistent weakness across the Atlantic. The European Central Bank cut rates by another 25 basis points on Thursday; a day earlier, figures showed the eurozone failed to grow on a quarterly basis in Q4, despite projections of a modest uptick (0.1%).

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