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The U.S. economy defied near-unanimous calls for a recession in 2023 and ended the year on a better-than-expected note, a good sign for interest-rate cut hopefuls.
Gross domestic product increased by an annualized rate of 3.3 percent in the fourth quarter, according to the advanced estimate from the Commerce Department that was released on Thursday morning. Economists had projected an increase of 2 percent year-over-year, according to the median estimate from a Bloomberg survey. That end-of-year growth also comes on the heels of an especially strong third quarter, when real GDP increased by 4.9 percent year-over-year, the fastest pace since 2021. As economists expected, the strength in economic activity was primarily thanks to the American consumer, whose spending at the end of the year powered a stronger-than-expected holiday shopping season.
What's been remarkable is not the increase in GDP, but the fact that it has taken place in the context of such high interest rates, said ZipRecruiter Chief Economist Julia Pollack. "We've lived through something quite unprecedented: a big decline in inflation, a big increase in interest rates, without the typical decline in GDP growth and employment that usually follows," said Pollack, who spoke to Inc. before the release. "I think that'll remain the big story."
This new batch of data caps off a year of growth that has consistently surprised to the upside. Last year began with widespread predictions of a downturn, and yet, consumer spending held up, the unemployment rate remained low, all the while inflation has slowed down considerably to an annualized rate of 3.2 percent, down from the 40-year-high of 9.1 percent back in June 2022. Now, fewer economists expect a recession will materialize this year. That outlook offers a bright spot for business owners, who are still feeling sanguine as they struggle to deal with elevated prices and a historically tight labor market that has made hiring one of their most pressing problems.
Personal consumption, which was the biggest contributor to the growth in GDP, increased by 2.8 percent and reflected an uptick in consumer spending on both goods as well as services. When it came to services, Americans spent most heavily on food services, accommodations, and health care.
"We just saw a very strong holiday season with folks deciding to travel and spend more on experiences rather than actual gifts," said KPMG senior economist Yelena Maleyev in an interview ahead of the release. "Even in a high price environment, high interest rate environment, people still feel like they're able to spend, especially on necessities and experiences, because they are able to make up some of those inflation losses with higher wages."
Government spending at the federal, state, and local level also increased in the fourth quarter. Trade exports and imports both grew as well. Fixed investment, which includes business investments like industrial equipment and transportation vehicles as well as residential investments, squeaked out a modest 1.7 percent gain. Still, that marked the second straight quarter of deceleration.
This cooling in investment was expected by economists. Maleyev said this is an area to pay very close attention to in the year ahead, "Because we've just had so much heightened uncertainty over the last few months, and we don't expect that to come down anytime soon."
Pollack said this weak level of investment also signals a coming slowdown in hiring. "The investment numbers have not been so great since the Fed started raising rates," she explained. "When businesses are not investing in new fixed capital, and they're not opening new stores and buying new trucks and new warehouses, there is sort of a cap on how much they can expand."
Wells Fargo Economics summed up the release in two words: "Fed friendly." Even though the bank is not projecting the central bank to start cutting interest rates until May, its economists said there is enough positive news in the fourth quarter GDP report to, "keep market hopes for a rate cut at the March 20 meeting alive."
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U.S. Economy Ended a Resilient 2023 with Stronger-than-Expected Growth
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25.01.2024
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The U.S. economy defied near-unanimous calls for a recession in 2023 and ended the year on a better-than-expected note, a good sign for interest-rate cut hopefuls.
Gross domestic product increased by an annualized rate of 3.3 percent in the fourth quarter, according to the advanced estimate from the Commerce Department that was released on Thursday morning. Economists had projected an increase of 2 percent year-over-year, according to the median estimate from a Bloomberg survey. That end-of-year growth also comes on the heels of an especially........
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