US economy grew faster than expected during the 4th quarter

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The U.S. economy grew at a faster pace than expected at the end of 2023, underscoring its resilience even in the face of still-high inflation and steep interest rates.

Gross domestic product, the broadest measure of goods and services produced across the economy, grew by 3.3% on an annualized basis in the three-month period from October through December, the Commerce Department said in its first reading of the data Thursday.

That is far higher than the 2% increase forecast by Refinitiv economists, although it marks a notable drop from the rapid 4.9% pace seen during the third quarter.

“GDP has four cylinders, and the fourth quarter fired on them all,” said Robert Frick, corporate economist with Navy Federal Credit Union. “Pundits are already saying this will be as good as it gets, but then again, most were predicting a recession last year that never came.”

WHEN WILL THE FEDERAL RESERVE START TO CUT INTEREST RATES?

Consumer spending, which accounts for about two-thirds of GDP, continued to power economic growth during the fourth quarter. It rose 2.8% for the period, down just slightly from the previous quarter.

Increases in private inventory investments, a boost in federal government spending and a jump in non-residential fixed income also helped to boost the GDP numbers. However, high mortgage rates continued to drain demand from the real estate market, with investment in housing plunging 27% for a second straight quarter.

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THE INFLATION FIGHT FACES A ‘DIFFICULT’ LAST MILE

State and local government spending also helped to fuel the expansion, climbing 3.7% during the fourth quarter. Gross private domestic investment rose 2.1%, another contributor to growth.

“Once again, it’s the strength and resiliency of the consumer that carries the day for the U.S. economy,” said Jim Baird, Plante Moran Financial Advisors CIO. “Solid labor market conditions and wage growth coupled with the ability to tap cash and available credit continue to fuel spending.”

The economy has remained solid even as experts predicted that the Federal Reserve’s aggressive interest rate hike campaign would send it spiraling into a recession. For all of 2023, the economy expanded 3.1%, up less than 1% in the previous year. 

manufacturing worker

However, there are signs that growth is finally beginning to slow in the face of tighter monetary policy. Job growth is moderating. The housing market, which is vulnerable to higher interest rates, is trapped in a prolonged downturn, and consumer spending has shown signs of cooling off.

Many economists expect to see further cooling in coming months as higher interest rates continue to work their way through the economy.

“While there is no doubt the economy still has some winds in its sails, we believe cooler days are on the horizon,” said Lydia Boussour, EY senior economist. “Consumers will likely remain cautious with their spending as they confront ‘cost fatigue’ and less vibrant labor market conditions.”

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