Strong core business spending hints at another robust GDP report

American business spending on core equipment came in higher than forecast in December, with both orders and shipments pointing to strong growth to end the year, according to Commerce Department data released on Tuesday.

Stronger growth, however, caused consumer confidence to fall in January as consumers expected higher inflation.

The increases in business investment were in line with our prediction that many businesses have been pulling forward their orders to avoid potential tariffs.

On top of that, as political uncertainty faded after the election, businesses have been more comfortable to make longer-term investments, anticipating lower taxes and interest rates.

Our focuses were on the orders and shipments of capital goods that exclude defense and aircraft spending, a better proxy for the private business investment component of GDP.

On a three-month moving average annualized, orders increased by 3.8% and shipments rose by 3%, both much higher than the previous quarter. The two metrics stood at 0.1% and -2.5% in the third quarter.

Inventory buildups also increased in December, posting a 1.3% increase on a three-month moving average annualized.

That means we should expect a stronger figure for gross domestic product in the fourth quarter, which is tracking at 2.8%. If the goods trade data on Wednesday comes out within expectations, we think GDP for the fourth quarter should be at 3% or above.

Now, if businesses are pulling forward their spending because of the expectation of tariffs, does that mean spending will slow in the next 12 months? We think that could be the case for businesses that have exposure to international trade; replacing their global supply chains cannot be done right away.

For other businesses that will benefit from lower taxes and more investment like fossil fuels, artificial intelligence and technology, investment will continue to grow not only because of a more business-friendly environment but also because of the need to innovate and compete.

Consumer confidence

In a separate report, consumer confidence fell to the lowest level in four months, the Conference Board said on Tuesday. The index came in at 104.1, down from 109.5 in the prior month.

Higher inflation expectations and lower job gains were the top two reasons for the drop in January. The median expectation for inflation increased to 4.3%, the highest since July, while the labor differential index fell to 16.2, the lowest since September.

After running hot in recent months because of the rebound from the one-time weather events and labor strikes in September, job gains might come back to normal as the labor market continues to slow.

We are expecting job gains to fall back in line with our long-term level of between 120,000 to 150,000 in the next three months.

There are valid reasons why consumers are expecting higher prices, including the expectation of higher tariffs and stronger demand growth.

The takeaway

With strong underlying growth in business investment, we are expecting a 3% increase in GDP for the last quarter. Stronger growth, however, will put some pressure on inflation, especially on inflation expectations, reflected in the consumer confidence data in January.

As the Fed is poised to keep interest rates unchanged in January after this week’s meeting, we are expecting the Fed not to cut rates anytime soon given the current growth and labor data.

This article was written by Tuan Nguyen and originally appeared on 2025-01-28. Reprinted with permission from RSM US LLP.
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