The U.S. economy continued to grow in the last quarter .
The Commerce Department said on Thursday (25.01.2024) that gross domestic product grew at an annualised rate of 3.3% in the fourth quarter, following expectations of 2% growth after growing at 4.9% in the third quarter.
Overcoming pessimistic expectations
The US economy has outperformed expectations. The world's largest economy was expected to end 2023 in recession. Instead, GDP accelerated. It was 3.1% higher in the fourth quarter than a year earlier, compared with a 0.7% year-over-year increase in the fourth quarter of 2022. Economists surveyed by The Wall Street Journal last January predicted that GDP would grow just 0.2% year-over-year in the fourth quarter of 2023.
Details from Thursday's GDP report suggest that, at least for now, the economy will continue to move forward. A resilient labor market has supported strong consumer spending and eliminated the feared downturn.
Consumption continues to dominate
Consumer spending, the "engine of the economy", grew at an annual rate of 2.8%. This suggests, in line with the retail sales data, that spending growth accelerated by the end of the quarter. As a result, spending in December was significantly higher than the average level of spending during the quarter, effectively creating a run-up to the first quarter. As a result, it looks like even if spending in the first quarter had not moved from December's level, spending in the first quarter would still have been annualized 1.9% higher than in the fourth quarter.
There was more good news on the inflation front as well. The Commerce Department's gauge of consumer prices, the Federal Reserve's preferred inflation metric, rose at a 1.7% annual rate in the fourth quarter from the previous quarter, following a 2.6% increase in the third quarter. So-called core prices, which exclude food and energy prices in an effort to better capture the inflation trend, rose at a 2% pace, matching the increase in the third quarter.
Expansion will continue
Expansion is expected to continue in 2024, albeit at a significantly slower pace. As inflation moderates, the Federal Reserve is likely to move towards cutting interest rates , which would support the economy this year. But that increase could be challenged by slower hiring and increased pressure on Americans who have spent pandemic-era savings.
Coming in for a "soft" landing
The last three months of the year have looked much like the so-called "soft" landing that Fed officials are trying to achieve. Growth has been strong, employers have added nearly half a million jobs and inflation has cooled to an annual 1.7%, below the Fed's 2% target.
Fed officials are on track to hold rates steady at a 23-year high at this week's meeting (31.01.2024).
Much of the credit for the better-than-expected growth goes to discretionary-spending consumers, who spent more on health care, dining out and cars in 2023.
Wages are rising faster than prices
Confidence in the economy rose as wage growth outpaced price growth. Consumer sentiment rose 29% from November to January, the biggest two-month increase since 1991, the University of Michigan said. Consumers expect inflation to be much milder than they thought just a few months ago.
Consumer products giant Procter & Gamble reported its earnings results on Tuesday (23.01.2024). The company posted strong earnings, reflecting growth due to price increases and higher sales volumes.
A jump in government spending, particularly at state and local level, and a boost to international trade also contributed to annual growth. Business investment grew at a slightly slower pace in 2023 compared with the previous year.
Stock market growth
The prospect that the Fed could cut interest rates in the not-too-distant future has boosted the stock market recovery in recent months, and cheaper funding costs could revive investment by households and businesses later this year. A gradual cooling in the labor market combined with progress in taming inflation is forcing investors to keep an eye on when the Fed might start cutting its benchmark interest rate.
Although Fed officials have said they don't want to cut rates until they are convinced that price pressures have been permanently contained, markets have turned their attention to the possible growth that could follow. If the Fed wants to achieve a "soft" landing, it will have to ease monetary policy this year.