Economic Data Signals Softening Momentum Ahead of Key Q4 GDP Report

The latest batch of economic data released on January 29, 2025, paints a mixed picture of the U.S. economy as investors and policymakers brace for key reports later this week, including the first estimate of fourth-quarter GDP growth. While the labor market remains resilient, declining mortgage applications, rising trade deficits, and falling inventories suggest that economic momentum may be softening.

This report analyzes the latest economic indicators and discusses their potential implications for monetary policy, corporate earnings, and the broader financial markets.

Mortgage Applications Fall as Borrowing Costs Remain a Headwind

The Mortgage Bankers Association reported a 2.0 percent decline in weekly mortgage applications, reversing the prior week’s marginal 0.1 percent gain. This suggests that higher borrowing costs and affordability challenges continue to weigh on the housing market, limiting demand despite some signs of stabilization in home prices.

Although the Federal Reserve has signaled a shift toward rate cuts later in 2025, mortgage rates remain elevated compared to pandemic-era lows. Until there is a meaningful decline in borrowing costs, home sales activity may continue to face headwinds, particularly in high-cost markets.

Trade Deficit Widens Sharply, Raising Concerns Over Net Export Contribution to GDP

December’s advance international trade report revealed a significant widening of the goods trade deficit to $122.1 billion, up from a revised $103.5 billion in the prior month. This deterioration was largely driven by stronger imports, suggesting that consumer and business demand for foreign goods remained robust. However, weaker export growth also raises concerns about slowing global demand for U.S. goods.

A larger trade deficit implies that net exports could detract from fourth-quarter GDP growth. The strength of the U.S. dollar over the past year has made American goods more expensive for foreign buyers, potentially weighing on exports in key sectors such as manufacturing, agriculture, and technology.

Declining Inventories Could Signal Slower Business Investment

Retail and wholesale inventories both fell in December, pointing to a cautious approach by businesses heading into 2025. Retail inventories declined by 0.3 percent, while wholesale inventories dropped by 0.5 percent. These figures suggest that businesses are managing inventory levels carefully amid uncertain consumer demand.

While lower inventories could help prevent excess supply and protect profit margins, they may also signal weaker business investment, which could weigh on economic growth in the coming quarters. A slowdown in inventory accumulation was a major drag on GDP in the third quarter, and if this trend continues, it could further constrain economic expansion.

Key Data Releases on the Horizon

The economic outlook will become clearer later this week as investors digest several high-impact data releases. The first estimate of fourth-quarter GDP, scheduled for release on January 30, will be closely watched for signs of slowing growth. Analysts expect a 2.3 percent annualized expansion, down from 3.1 percent in the third quarter, reflecting more moderate consumer spending and weaker business investment.

Other key data points to watch include the GDP price deflator, which will provide insights into inflation trends, and weekly jobless claims, which remain a critical barometer for the strength of the labor market. December’s pending home sales data, also set for release on Thursday, will offer further clues on the state of the housing market.

Market and Policy Implications

With economic growth expected to moderate, attention will turn to the Federal Reserve and its potential policy response. The European Central Bank is set to hold a policy meeting on January 30, providing a preview of how global central banks are assessing the economic landscape. In the U.S., markets will be looking for signals from the Federal Reserve on the timing of potential interest rate cuts later this year.

The Senate hearing for Health and Human Services nominee Robert F. Kennedy Jr. could also generate headlines, particularly given the ongoing debate over drug pricing, healthcare reform, and regulatory oversight of the pharmaceutical industry. Any policy shifts in this sector could have implications for healthcare stocks and broader market sentiment.

Conclusion

The latest economic data suggests that the U.S. economy is entering 2025 on a softer footing, with trade imbalances, weaker inventories, and a slowdown in mortgage activity pointing to potential headwinds. However, the upcoming GDP report and other key indicators will provide a clearer picture of the overall trajectory.

For investors, the focus remains on how these trends will influence Federal Reserve policy, corporate earnings, and market dynamics in the months ahead. While the economy appears to be slowing from its strong third-quarter performance, the resilience of the labor market and consumer spending will be critical factors in determining whether growth remains stable or weakens further.