The U.S. economy defied expectations, surging at a remarkable 3.3% annualized rate in the fourth quarter of 2023, as reported by the Commerce Department. This robust growth exceeded the Wall Street consensus estimate of 2%, showcasing resilience that defied earlier forecasts of an impending recession. Despite concerns about an economic downturn, the data revealed that the U.S. effortlessly skirted a recession, with the third quarter boasting an impressive 4.9% pace of growth.
In addition to the better-than-expected GDP performance, there were positive signs on the inflation front. Core prices for personal consumption expenditures (PCE), a metric favored by the Federal Reserve for gauging long-term inflation, rose by 2% during the period, while the headline rate stood at 1.7%. On an annual basis, the PCE price index increased by 2.7%, a considerable drop from the 5.9% reported a year ago. The core figure, excluding food and energy, posted a 3.2% annual increase, down from 5.1%.
Economists celebrated what Beth Ann Bovino, Chief Economist at U.S. Bank, dubbed a “supersonic Goldilocks” scenario – robust economic growth coupled with subdued inflation. The strong GDP figures indicated increased consumer spending, particularly on items like new cars, recreation, and travel. The economic resilience demonstrated marked progress towards the anticipated soft landing.
For 2023, the U.S. economy accelerated at a 2.5% annualized pace, surpassing initial Wall Street expectations and outperforming the 1.9% increase recorded in 2022. Consumer spending, a consistent driver throughout the year, increased by 2.8% in the fourth quarter, and state and local government spending rose by 3.7%. Federal government expenditures saw a 2.5% increase, contributing to the overall robust quarter. Gross private domestic investment also played a significant role, rising by 2.1%.
While the GDP report was met with positive market reactions, economists highlighted the backward-looking nature of GDP, providing insights into past economic performance rather than future projections. Despite the optimistic report, concerns linger about potential challenges ahead, including the lagged effects of 11 interest rate hikes approved by the Federal Reserve and political and geopolitical uncertainties as the U.S. enters a presidential election year.