The Big Picture: A Weakening Economy Under Biden

The latest GDP report for the fourth quarter of 2024 paints a concerning picture of the U.S. economy under President Joe Biden. While the headline growth rate of 2.3 percent may seem modestly positive, the underlying data reveals significant weaknesses that were not immediately apparent. This figure, unchanged from the first estimate, hides troubling revisions in key economic indicators, such as business investment and consumer income growth, which suggest the economy is losing momentum faster than previously thought. The slowdown in GDP growth from 3.1 percent in the third quarter to 2.3 percent in the fourth quarter underscores a growing fragility in the economic landscape. Many economists had warned about these underlying issues, but the latest data confirms that the economy is in a more precarious state than initially believed.

Business Investment: A Key Indicator of Economic Health

Business investment is a critical driver of economic growth, both in the short and long term. It fuels demand for capital goods, promotes innovation, and lays the foundation for future productivity and wage growth. However, the latest GDP revisions reveal a sharp decline in business investment, particularly in nonresidential sectors, which fell from -2.2 percent to -3.2 percent. This downward revision is alarming, as it signals that firms are pulling back on spending due to uncertainty about future demand. Equipment investment, for instance, plummeted from -7.8 percent to -9.0 percent, while intellectual property products, once thought to be growing at 2.6 percent, were revised down to 0.0 percent. This stagnation in innovation spending is particularly concerning, as it suggests that businesses are losing confidence in the economy’s direction. Historically, such significant contractions in business investment have often preceded broader economic slowdowns, raising questions about the economy’s resilience.

Consumer Spending: A Mixed Picture

While consumer spending remains a bright spot in the economy, rising by 4.2 percent, the details behind this figure are less encouraging. Spending on goods was revised downward, and real disposable income growth was weaker than initially reported. This suggests that while households are still spending, their purchasing power is not growing as quickly as previously thought. Furthermore, the recent surge in consumer spending has been partly fueled by the dwindling savings from the pandemic era. With higher borrowing costs and persistent inflation, the much-celebrated consumer resilience may soon give way to fragility. If the labor market begins to weaken, as suggested by the recent surge in jobless claims, consumer spending could retreat, further slowing economic growth. This interplay between consumer behavior and broader economic conditions highlights the delicate balance the economy currently maintains.

Housing Market: A Leading Indicator of Economic Weakness

The housing market, often a bellwether for broader economic trends, is flashing warning signs. Pending home sales dropped 4.6 percent in January, hitting their lowest level since 2001. This decline, larger than expected, reflects the strain of high mortgage rates and rising home prices on affordability. The South, the nation’s largest home-selling region, experienced a staggering 9.2 percent decline in contract signings, the biggest drop since the start of the COVID-19 pandemic. While winter weather may have played a role, the persistent issue remains the growing unaffordability of homeownership. Home prices continue to rise, increasing by 3.9 percent in December compared to the previous year, further squeezing potential buyers. With mortgage rates hovering near seven percent, the housing market is signaling potential weakness ahead, which could ripple through the broader economy, affecting sectors from construction to consumer spending.

Inflation and Monetary Policy: A Delicate Balance

The latest data also revised core PCE inflation upward to 2.7 percent, a figure that may seem modest but carries significant implications. This upward revision highlights the challenges the Federal Reserve faces in balancing inflation control with economic growth. The decision to cut rates toward the end of the Biden administration now appears questionable, as inflation remains stubbornly sticky. If inflation persists while business investment weakens, the economy could enter a dangerous scenario where growth slows, but the Fed is forced to maintain restrictive monetary policies to combat inflation. This delicate balance underscores the risks of policy missteps and the need for careful calibration in the months ahead.

Government Spending: A Temporary Lifeline?

The economy’s 2.3 percent growth rate in the fourth quarter was partially propped up by a surge in government spending, which increased by 4.0 percent—faster than the 3.2 percent initially estimated. Defense spending, in particular, rose by 4.7 percent, up from the earlier estimate of 3.3 percent. While this injection of government funds helped sustain economic activity, it is not a sustainable substitute for private sector investment. The central question now is whether businesses will regain confidence and resume investing, or if the economy is heading into a prolonged period of stagnation. The latest revisions to the GDP data expose deeper economic fragility than previously understood, though they do not yet signal an imminent collapse. However, they do indicate that the economy is more vulnerable than it appeared just a few months ago, raising concerns about its ability to weather future challenges.