Although the economy experienced a slowdown at the end of last year, it still performed relatively well, with strong consumer spending balancing out declines in business investments and inventory accumulation.

According to data from the Commerce Department released on Wednesday, the U.S. gross domestic product (GDP), which reflects the overall value of goods and services produced, grew at a seasonally adjusted annual rate of 2.3% from October to December. This is a decrease from the 3.1% growth seen in the third quarter and from an average growth rate of 2.6% during the first three quarters of the year.

Economists polled by Bloomberg had anticipated a 2.6% growth in output.

How much did the economy grow last year?

For the entirety of 2024, the economy registered a growth of 2.8%, slightly down from the previous year’s 2.9% rate.

The report offers a generally optimistic view of the economy during the final months of former President Joe Biden’s administration, but it may also reflect some uncertainty in business stemming from anticipated policies under President Trump, particularly concerning tariffs and immigration, according to economists.

Is consumer spending up or down?

The positive news is that American consumer spending remains a strong component of the economy. It increased by an impressive 4.2% at an annual rate, following a 3.7% increase in the third quarter. Consumer spending accounts for approximately 70% of the economic activity.

Since May 2023, wage increases have outpaced inflation, enhancing workers’ purchasing power. Additionally, a surge in the stock market and an increase in home values have enriched higher-income households, encouraging them to spend more, as reported by Moody’s Analytics.

Wealthier Americans contribute disproportionately to consumer spending, and their increased spending habits have compensated for the economic challenges faced by lower- and middle-income households, according to Moody’s.

Meanwhile, lower-income individuals are struggling with high inflation and rising interest rates, resulting in record levels of U.S. credit card debt and heightened delinquency rates. These financial difficulties could have a more significant impact on the economy in the coming year, as noted by economist Ryan Sweet from Oxford Economics.

Furthermore, two hurricanes in the Southeast last fall compelled residents to replace damaged vehicles, which in turn boosted auto sales, according to a research note from Goldman Sachs.

Has the Fed reduced interest rates?

A thriving economy may mean that the Federal Reserve can delay its interest rate cuts for a longer period.

On Wednesday, the Federal Reserve halted its recent series of interest rate cuts while it waits to see the details of Trump’s planned tariffs and immigration policies, and assesses whether inflation will slow down again after stalling recently. There is a concern that Trump’s policies might reignite inflation, prompting the Fed to maintain higher rates for an extended time, according to economists.

“This was a decent fourth quarter GDP report that underscored solid consumer spending and a sustainable economic growth that seems likely to continue into the early part of this year,” stated economist Scott Anderson from BMO Capital Markets in a note to clients. “However, with year-on-year GDP growth still somewhat robust, the Fed will need to remain patient as it waits for more information on tariffs and the trajectory of inflation before resuming rate cuts.”

Forecasts for this year suggest that the economy will grow by 2.2%, according to economists surveyed by Wolters Kluwer Blue Chip Economic Indicators.

How other parts of the economy fared:

Housing boosts growth

Investment in housing and renovations rose by 5.3% after two consecutive quarters of decline.

Residential investment had been sluggish due to elevated mortgage rates.

However, home construction picked up towards the end of last year, particularly in the apartment sector, in response to an ongoing national housing shortage.

Government spending rises

Government expenditures grew by 2.5%, down from 5.1% in the previous quarter, with federal spending climbing 3.2% and state and local spending increasing by 2%.

Nevertheless, Trump’s federal hiring freeze and overall budget cuts may lead to a decrease in government spending in this quarter, as noted by economist Paul Ashworth of Capital Economics.

Business investment declines

Investment from businesses fell by 2.2% following a 4% increase in the previous quarter.

Expenditures on computers, delivery vehicles, factory machinery, and other equipment dropped by 7.8%.

Spending on buildings, oil rigs, and other structures saw a decline of 1.1%.

Business uncertainties over tariffs and a restricted labor supply due to potential deportations of immigrants lacking permanent legal status could be impacting investments, according to Barclays.

Additionally, despite the Fed reducing its key interest rate by a percentage point late last year, borrowing costs for companies remain high, as expressed by Wells Fargo economist Sam Bullard.

Goldman Sachs indicated that the decline in equipment spending could be attributed to a 53-day strike by machinists at Boeing, with economist Bernard Yaros from Oxford Economics attributing the downturn to an “unsustainable boom in aircraft investment” from earlier last year.

Business stockpiling slows

Companies are replenishing their inventories at a slower pace, which diminished economic growth by almost a percentage point. Strong auto sales may have caused dealers to reduce their stockpiles, according to Goldman Sachs.

(This story was updated to add new information.)