Consumer Spending Drives Economic Growth in Fourth Quarter, but Concerns about Inflation and Labor Market Loom

Consumer spending, which accounts for two-thirds of GDP, increased at a 3.3% rate in the fourth quarter. This growth was driven by higher spending on health care and financial services, although spending on goods was revised lower. Nonresidential investment figures also strengthened, with upward revisions to spending on structures, intellectual property, and equipment.

Recent economic indicators suggest that consumers may be becoming more selective in their spending, following years of pent-up demand-driven consumption. Data on personal consumption expenditures for February are expected on Friday. The trajectory of inflation and the labor market will play a crucial role in determining how long consumers can continue to support economic growth. Another report showed that continuing applications for US unemployment benefits rose to 1.82 million in the week ending March 16, the highest level in nearly two months.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation metric, rose at a 1.8% annual rate in the fourth quarter, the lowest since 2020. Excluding food and energy, the index increased by 2%, slightly less than the previous estimate. Adjusted pre-tax corporate profits saw a 4.1% increase, the largest since mid-2022. After-tax profits as a share of gross value added for non-financial corporations remained high at 15.1%.

Recent earnings reports have shown that publicly-traded companies are experiencing higher gross margins due to relief on input costs, though this isn’t necessarily translating to lower prices for consumers. This trend has contributed to investor optimism, as the S&P 500 is on track for its fifth consecutive month of gains