The US economy sustained its momentum in Q4 2024, with real Gross Domestic Product (GDP) rising at an annual rate of 2.3 percent. This growth was largely driven by increased consumer and government spending, though it was somewhat tempered by a decline in investment.

Rising inflation has contributed to a slower pace of GDP growth, however, with the Consumer Price Index rising by 3.0 percent on the year in January 2025. This increase remains above the Federal Reserve’s 2.0 percent target. Core inflation (excluding food and energy) stands at 3.3 percent, underscoring ongoing upward pressure, which may influence interest rate decisions. With US consumer confidence falling at its sharpest pace in three and a half years in February 2025, policy choices will not be easy.

The economy is resilient for now, with growth underpinned by a strong labor market. Total nonfarm payroll employment increased by 143,000, while the unemployment rate edged down slightly to 4.0 percent in January 2025. Wage growth also remains a bright spot, with average hourly earnings up 4.1 percent on the year, suggesting continued consumer spending resilience. Yet certain metrics, such as the labor force participation rate (62.6 percent), the employment-population ratio (60.1 percent) and the part-time employment for economic reasons indicator (4.5 million) have remained relatively flat. These data points suggest that more slack could creep into the labor market and that there may be pockets of underemployment which could weigh on broader economic performance.

The most significant change this quarter is the new administration entering into office with a new wave of policy considerations. After temporarily pausing a series of proposed tariffs, the new administration moved forward by levying a 25.0 percent tariff on qualifying imports from Mexico and Canada, with a series of exemptions for specific industries. The Trump administration also doubled the tariffs on all imports from China from 10.0 percent to 20.0 percent. This is in addition to a broad 25.0 percent levy on all steel and aluminum imports into the United States. The impact of these tariffs on domestic production, inflation and unemployment remains a key area of focus for 2025.

Despite the uncertainties introduced by new policy directions, the US economy has shown remarkable adaptability. The combination of steady GDP growth, moderated inflation and a robust labor market underscores the economy’s capacity to navigate evolving challenges.