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Biden’s Stumbling Economy Was Even Worse Than We Thought
So much for the idea that Donald Trump inherited a historically strong economy from Joe Biden.
The latest GDP report released Thursday by the Bureau of Economic Analysis confirms what many economists had been quietly warning: beneath the surface, the economy is weaker than it seemed. The fourth quarter 2024 data shows real GDP growth slowing to 2.3 percent, down from 3.1 percent in third quarter, marking a clear loss of momentum. While this figure remains unchanged from the first estimate, key components within the report reveal a more concerning picture as revisions have exposed additional weaknesses.
One of the most important changes in the latest revision is the downgrade in business investment and consumer income growth. Gross private domestic investment declined more than previously estimated, falling from -5.6 percent to -5.7 percent. Within fixed investment, the downward revision was even steeper, from -0.6 percent to -1.4 percent.
The real concern lies in nonresidential investment, which fell from -2.2 percent to -3.2 percent, signaling a deeper pullback in corporate spending. Within this category, equipment investment saw an already severe decline revised to a calamitous plunge, worsening from -7.8 percent to -9.0 percent. Intellectual property products, once estimated to have grown 2.6 percent, were revised down to 0.0 percent, signaling a halt in the growth of innovation spending.
The Role of Business Investment in Economic Growth
Why does business investment matter so much? In the short term, it drives demand for capital goods and services. In the long term, it’s the foundation for higher productivity, which ultimately determines wage growth and living standards. When businesses cut back on investment, they’re signaling uncertainty about future demand, and that uncertainty has a way of becoming self-fulfilling.
The sharper-than-estimated decline in business investment suggests that firms are holding off on expansions, a sign that American businesses had grown weary of economic conditions that prevailed at the end of the Biden administration. Historically, large contractions in business investment have often preceded broader slowdowns. This isn’t proof that a recession is around the corner, but it does suggest that the economy’s underlying resilience is more fragile than previously assumed.
While consumer spending remained a relative bright spot, rising 4.2 percent, that number alone doesn’t tell us much about sustainability. Spending on goods was revised downward, and real disposable income growth was weaker than initially reported. In other words, while households are still spending, they’re not necessarily gaining purchasing power at the rate we once thought.
Moreover, the surge in spending has been partially financed by the fading tailwinds of excess savings from the pandemic era. With higher borrowing costs and persistent inflation, it seems likely that the much talked about consumer resilience may turn into consumer fragility. If the labor market begins to crack, spending will probably retreat. That’s why the surge in jobless claims in this week’s report stirred up a lot of investor anxiety on Thursday.
Housing Market Signals Additional Weakness
The latest housing data reinforces the idea that we may be teetering on the edge of a broader economic slowdown. Pending home sales fell 4.6 percent in January to their lowest level on record, dating back to 2001. The decline, larger than economists had expected, highlights the strain that high mortgage rates and rising home prices are placing on affordability.
The South, the nation’s largest home-selling region, saw a 9.2 percent decline in contract signings, the biggest drop since the onset of the COVID-19 pandemic. While winter weather may have played a role, the persistent issue remains affordability—home prices rose 3.9 percent in December from a year earlier, continuing an upward trend that has put homeownership out of reach for many Americans.
Higher mortgage rates, hovering near seven percent, have been a key driver of the slowdown. This suggests that housing, typically a leading indicator for economic activity, could be signaling further weakness ahead. If the housing market continues to deteriorate, its impact will ripple through broader economic sectors, from construction to consumer spending.
Speaking of inflation, the report revised core PCE inflation up a tenth of a point to 2.7 percent. That may not sound like much, but it’s enough to highlight the irresponsibility of the Fed’s cuts at the tail end of the Biden administration. If inflation remains sticky while business investment weakens, we could be heading into the kind of economic environment where growth slows but the Fed needs to keep monetary policy restrictive.
Another warning sign is that the 2.3 percent growth rate required a surge in government spending. Federal outlays increased by 4.0 percent, faster than the 3.2 percent estimated last month. Defense spending surged 4.7 percent, revised up from the prior estimate of 3.3 percent, indicating a troubling reliance on war machine building to grow the economy. While this helped prop up the economy, it’s not a substitute for private sector investment. The real question is whether businesses regain the confidence to invest, or whether we’re looking at a prolonged period of stagnation.
The latest revisions expose deeper economic fragility than the earlier estimate suggested. These are not signs of imminent collapse, but they do indicate an economy that is more fragile than it appeared just a few months ago.
