The US economy’s fourth-quarter growth trounced forecasts as cooling inflation fueled consumer spending, capping a surprisingly strong year that defied recession calls.
Gross domestic product increased at a 3.3% annualized rate, according to the government’s preliminary estimate out Thursday. For all of 2023, the economy expanded 2.5%.
The economy’s main growth engine — personal spending — rose at a 2.8% rate. Business investment and housing also helped fuel the larger-than-expected advance last quarter.
A closely watched measure of underlying inflation rose 2% for a second straight quarter, in line with the Federal Reserve’s target, the Bureau of Economic Analysis report showed. Stock futures rose while Treasury yields were lower as traders focused on the inflation figures and boosted the odds of a March rate cut.
The figures wrap up a year in which the economy showed surprising stamina, defying expectations by many Wall Street economists that the country was poised to slip into a recession.
Despite the burden on households and businesses from Fed interest-rate hikes, consumer spending was continuously powered by durable job growth and diminishing inflation.
Ahead of the November elections, President Joe Biden may point to the GDP figures as he tries to convince Americans he’s been doing a good job on the economy. Consumer sentiment has also been improving in recent months.
Boosted by better-than-expected holiday spending, the fourth-quarter numbers suggest the economy carried some momentum into the new year, feeding expectations the expansion is on stronger footing. Nonetheless, growth is seen moderating this year.
The path of inflation, and how the Fed responds to it, will be key in defining the direction the economy is headed this year. The longer interest rates remain restrictive, the more economists anticipate borrowing costs to impact demand, as well as hiring and expansion plans.
“The Fed has already explained why easing makes sense even if economic growth is strong, but not willy-nilly rate cuts,” Chris Low, chief economist at FHN Financial, said in a note. “Today’s GDP release, while it is 2023 data, reinforces the logic leading the Fed to a cautious approach.”
Central bankers next week are expected to hold rates at the highest level in two decades, though they have already started discussing easing monetary policy.
The data suggest inflation continues to dissipate. Service-sector inflation excluding housing and energy, a narrower measure tracked by Fed officials, rose at a 2.6% rate, the slowest pace since the end of 2020. December figures on inflation, consumer spending and income are due Friday.
The GDP report showed broad consumer spending growth, with accounts for about two-thirds of the economy, as outlays for goods and services continued to climb. Combined spending on transportation, food services and recreation posted the largest increase since the second quarter of 2022.
Beyond healthy spending, which contributed 1.91 percentage points to GDP, business investment added 0.26 point. Business inventories unexpectedly added to fourth-quarter GDP.
Residential investment increased for a second straight quarter for the first time since early 2021.
Stripping out inventories, government spending and trade, inflation-adjusted final sales to private domestic purchasers — a key gauge of underlying demand — rose at a 2.6% rate.
This article was provided by Bloomberg News.