Tracking the Growth Trajectory

To begin with, here are some general thoughts on US economic growth.

Real GDP Growth:

After a sharp deceleration in Q1, growth has picked up steam since Q2, but has slowed somewhat in Q4. On a Quarter over Quarter Seasonally Adjusted Annual Rate (QoQ Saar) basis, Real GDP grew at an 2.3% rate in Q4 down from 3.1% in Q3 and 3% in Q2, while Atlanta Fed is tracking 2.9% growth for Q1, 2025. For context, post-GFC, growth averaged 2.4%, running at 2.2% pre-Covid and 2.9% post-Covid, indicating a meaningful pick-up in growth trajectory in the post-Covid era.

1.? Consumption [Personal Consumption Expenditures or PCE]

Consumption, the single most important driver of Real GDP in the United States, went up – it contributed 2.8 percentage points (pp) [out of 2.3% Real GDP growth] in Q4. This shows a acceleration from 2.5 pp in Q3 and 1.9 pp in Q2, while Atlanta Fed is tracking 1.9 pp contribution to growth for Q1, 2025. ?For context, for this component, post-GFC growth contribution averaged 1.7 pp, running at 1.5 pp pre-Covid and 2.2 pp post-Covid, indicating a meaningful pick-up in growth trajectory in the post-Covid era.

• The leading driver of strong consumption is a healthy labor market for reasons that may be obvious. Post-Covid boom in consumption has been supported by low unemployment and growth in real wages. It was supplanted by large fiscal transfers immediately after Covid that helped keep consumption buoyant despite a precipitous drop in employment. On the other hand, high inflation has dented consumer confidence, while credit availability has been restrained given high interest rates after one of the fastest Fed Hiking cycles that spanned from March 2022 to July 2023.

2.? Investments [Gross Private Domestic Investment or GPDI]

Investments slowed – it contributed -1.0 pp [out 2.3% Real GDP growth] in Q4. This shows a deceleration from 0.2 pp in Q3 and 1.5 pp in Q2, while Atlanta Fed is tracking 1.1 pp growth contribution for Q1, 2025. ?For context, for this component, post-GFC growth contribution averaged 0.7 pp, running at 0.7 pp pre-Covid and 0.7 pp post-Covid, indicating a steady pace of growth in private investments in the post-Covid era.

3.? Government Spending:

Government Spending slowed from recent high levels – it contributed 0.4 pp [out of 2.3% Real GDP growth] in Q4. This shows a deceleration from 0.9 pp in Q3 and 0.5 pp in Q2, while Atlanta Fed is tracking 0.4 pp growth contribution for Q1, 2025. ?For context, for this component, post-GFC growth contribution averaged 0.2 pp, running at 0.1 pp pre-Covid and 0.3 pp post-Covid, indicating a sustained pick up of growth in Government Spending in the post-Covid era.

• The post-Covid contribution to growth from Government Spending stands out. It is unusual for Government Spending to constitute such a large part of GDP growth as opposed to private expenditures during a period of economic boom.
• Government Spending includes Direct Spending on Goods & Services by the Government (e.g. Defense, Infrastructure, Education), but it excludes Direct Transfer Payments (e.g. Social Security, Unemployment Benefits, Food Assistance, various Fiscal Transfers for income support during Covid) in order to avoid double counting the effect of these components in GDP calculation as they are already reflected in consumption.
• While the post-Covid boom in consumption was partly supported by fiscal transfers, the direct spending programs such as Infrastructure Investment & Jobs Act and Inflation Reduction Act (IRA), are keeping government spending levels elevated even now, thereby boosting GDP growth.

4.? Net Exports:

Changes in Net Exports showed improvement – it was almost flat [<0.1 pp out of 2.3% Real GDP growth] in Q4. This shows an increase from -0.4 pp in Q3 and -0.9 pp in Q2, while Atlanta Fed is tracking -0.4 pp growth contribution for Q1, 2025. ?For context, for this component, post-GFC growth contribution averaged close to -0.1 pp, running at -0.1 pp pre-Covid and -0.3 pp post-Covid, indicating a higher Current Account Deficit in the post-Covid era.

• Net Export (Export minus Import) has been a consistent detractor from growth resulting in a widening of Current Account Deficit. It has been driven by faster growth in Imports relative to Exports post-Covid. In part, the higher net imports have been reflecting the relative strength of the US consumer demand.

Digging a bit deeper:

1.1 Consumption: PCE Goods

Goods Consumption picked up – it contributed 1.4 pp [out of 2.3% Real GDP growth] in Q4. This shows a continued acceleration up from 1.2 pp in Q3 and 0.6 pp in Q2, while Atlanta Fed is tracking 0.6 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth contribution averaged 0.8 pp, running at 0.7 pp pre-Covid and 0.9 pp post-Covid, indicating a pick-up in Goods Consumption in the post-Covid era.

1.2 Consumption: PCE Services

Services Consumption picked up – it contributed 1.5 pp [out of 2.3% Real GDP growth] in Q4. This shows a continued strength in Services Consumption, which printed 1.3 pp in Q3 and 1.3 pp in Q2, while Atlanta Fed is tracking 1.3 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth contribution averaged 0.9 pp, running at 0.8 pp pre-Covid and 1.2 pp post-Covid, indicating a meaningful pick-up in Services Consumption in the post-Covid era.

• Services Consumption has been one of the steadiest components driving GDP growth. With the exception of Q2-Q3 2023, the variation in its contribution to GDP has been very low.

2.1? Investments: Business Fixed Investments

Fixed Investments slowed – it contributed -0.1 pp [out of 2.3% Real GDP growth] in Q4. This shows a decline in Fixed Investments, which printed 0.4 pp in Q3 and 0.4 pp in Q2, while Atlanta Fed is tracking 0.5 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth contribution averaged 0.6 pp, running at 0.6 pp pre-Covid and 0.5 pp post-Covid, indicating a steady pace of growth in Fixed Investments in general, although with a moderate deceleration in the recent past.

• Taking a closer look at the constituents of Business Fixed Investments reveals that Nonresidential Investments is running at a steady pace of around 0.5 pp contribution to GDP growth in both pre- and post-Covid period. However, Residential Investments have decelerated from 0.1 pp average contribution pre-Covid to almost flat post-Covid. Residential Investments is likely showing the strains caused by high financing costs (30 yr Fixed Mortgage averaging around 7% since early 2023, substantially higher than its post-GFC average of around 4.5%) that has virtually frozen the housing market activity.

• Q4 print of 0.2 pp in Residential Investments shows an acceleration from Q3 print of -0.2 pp and Q2 print of -0.1 pp although mortgage rates were trending upward moving from 6.7% to 7.3% ?during this period (… not surprising given residential activity usually responds to mortgage rates with a lag).

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2.2? Investments: Changes in Private Inventory

Inventory dropped. Changes in Private Inventory contributed -0.9 pp [out of 2.3% Real GDP growth] in Q4 after printing -0.2 pp in Q3 and 1.1 pp in Q2, while Atlanta Fed is tracking 0.6 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth contribution averaged 0.1 pp, running at 0.1 pp pre-Covid and 0.2 pp post-Covid, likely capturing a spike in inventory adjustment to deal with Supply-Chain issues around Covid.

3.1? Government Spending: Federal Spending

Federal Spending contributed 0.2 pp [out of 2.3% Real GDP growth] in Q4. This shows a deceleration from 0.6 pp in Q3 and 0.3 pp in Q2, while Atlanta Fed is tracking 0.2 pp growth contribution for Q1, 2025. For context, for this component, post-GFC averaged 0.1 pp, running flat pre-Covid and 0.2 pp post-Covid, indicating a solid pick-up in this category post-Covid.

Taking a closer look, most of the pick-up in Federal Spending comes from increases in Nondefense Spending category while contribution from Defense Spending has been relatively flat post-GFC.

• Nondefense Spending ticked up a bit post Covid likely reflecting the traction of public projects, such infrastructure investments, climate initiatives etc., pursued under the Inflation Reduction Act (IRA). ?
• Changes in National Defense Spending have picked up a bit post-Covid likely due to additional spending to deal with the escalation of conflicts in Eurasia and the Middle East following the pandemic.

3.2? Government Spending: State & Local Government Spending

State & Local Government Spending contributed 0.2 pp [out of 2.3% Real GDP growth] in Q4. This shows a steady pace following 0.3 pp in Q3 and 0.3 pp in Q2, while Atlanta Fed is tracking 0.2 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth averaged 0.1 pp, running at 0.1 pp pre-Covid and 0.2 pp post-Covid, indicating a pick-up in State & Local Government Spending post-Covid.

4.1 Net Exports: Exports

Exports dropped. It contributed -0.1 pp [out of 2.3% Real GDP growth] in Q4. This shows an deceleration from 1.0 pp in Q3 and 0.1 pp in Q2, while Atlanta Fed is tracking 0.4 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth contribution averaged 0.3 pp, running at 0.4 pp pre-Covid and 0.2 pp post-Covid, indicating a slowdown in Exports in the post-Covid era.

Taking a closer look, both Goods and Services exports have decelerated in the post-Covid period relative to their pre-Covid averages. This likely reflects a weak demand environment in Rest of the World [RoW].

4.2 Net Exports: Imports

Imports ticked down. It contributed 0.1 pp [out of 2.3% Real GDP growth] in Q4. Note: a pick-up in Import is an outflow and therefore, a pick-up in import shows up as a negative contribution to GDP report whereas a slowdown shows up with a positive sign. The latest print shows a drop from -1.4 pp in Q3 and -1.0 pp in Q2, while Atlanta Fed is tracking -0.8 pp growth contribution for Q1, 2025. For context, for this component, post-GFC growth contribution averaged -0.5 pp, running at -0.4 pp pre-Covid and -0.6 pp post-Covid, indicating a rapid pick-up in Imports in the post-Covid era.

Taking a closer look, Goods imports have accelerated in the post-Covid period while Services imports, which is a lower share of imports, has also increased modestly pointing to a strong consumption demand within the United States.

• Overall, a simultaneous decline in Goods Export (from 0.3 pp to 0.2 pp) and a pick-up in Goods Import (from -0.4 to -0.5) have resulted in a negative contribution to growth from Net Exports of Goods registering a -0.2 pp change in average contribution between pre-Covid and post-Covid periods.
• Net Exports of Services shows a similar trend, but to a slightly lower magnitude registering a -0.1 pp change in average contribution between pre-Covid and post-Covid periods.

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*numbers are approximate; source: FRED, Atlanta Fed, World Bank, BLS; as of: Feb-2025