The U.S. economy grew at a 3.3% annual rate in the fourth quarter, according to the Commerce Department. Economists surveyed by FactSet had estimated 1.7% growth, while both the Federal Reserve Bank of Atlanta’s GDPNow and the New York Fed Staff Nowcast models put the number higher, at 2.4%. While Thursday’s data topped economists’ expectations, it is lower than the third quarter’s 4.9% reading.
For the full year, real GDP increased 2.5% in 2023, compared with the estimate for 2.4% growth, and compared with the 1.9% increase in 2022.
The fourth-quarter’s GDP growth was led by several factors, including consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential fixed investment.
The deceleration from the third quarter represented slowdowns in private inventory investment, federal government spending, residential fixed investment, and consumer spending.
According to the Commerce Department, the increase in consumer spending came from both services and goods, led by healthcare spending and recreational goods and vehicles, respectively.
Consumer spending has been a consistent strong point for the U.S. economy, despite high interest rates and inflation. Consumer sentiment at the beginning of January jumped to its highest reading since July 2021, according to the University of Michigan. Retail sales for December came in above expectations, too. December’s unemployment was 3.7%, near a historic low.
“The consumer, boosted by a strong job market and wage growth, has trounced last year’s recession fears,” wrote Damian McIntyre, portfolio manager at Federated Hermes. “This report likely reduces rate cuts in 2024 and is another strong indication that Jerome Powell could get his soft landing,”
However, shoppers are dipping into their savings to fuel spending. Personal savings came in at $818.9 billion in the fourth quarter, a 3.8% decrease from $851.2 billion in the third quarter, and the personal saving rate slipped to 4% from 4.2%.
“Moving forward, the Fed is confident that inflation will fall to the 2% target level, giving consumers greater purchasing power and the ability to replenish savings balances,” wrote Steve Rick, chief economist at TruStage, in a report.
Another notable data point is the personal-consumption expenditures price index, which increased 1.7% in the quarter. Taking out the volatile food and energy prices, the PCE price index increased 2%.
The Fed is targeting inflation of 2%. On Friday, the Bureau of Economic Analysis will release December’s core PCE numbers—the Federal Reserve’s preferred inflation metric. Economists project core PCE inflation rose 3% year over year in the month.
The PCE numbers suggest that so far the Fed has been successful in taming inflation while avoiding a recession. This may bolster the case that the central bank can cut rates soon.
Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, wrote on Thursday that he views the data as “bullish for both the economy and the stock markets. We do expect that the Fed’s next interest-rate move will be a rate cut, but our expectations for the first cut are the May-June 2024 window.”
According to the CME FedWatch Tool, 52.3% of traders expect a 25-basis-point rate cut at the Central Bank’s May meeting.
Richard Flax, chief investment officer at Moneyfarm, noted that while financial markets are pricing in lower rates through 2024, strong economic data create some doubt about the speed of those declines.
“Much will depend on the trajectory of both inflation and the domestic demand over the coming quarters,” Flax wrote. “We would expect to see economic growth to slow down from here, even if the economy ended 2023 in robust shape.”
Residential fixed investments increased 1.1% in the quarter, a steep deceleration from the third quarter’s 6.7%. Citi economist Veronica Clark flagged housing as an area to watch in the report in a research note on Tuesday.
“Home sales have been limited partly by a lack of supply of homes to buy over the last year, with higher mortgage rates through October also weighing further on sales in [the fourth quarter],” Clark said.
The stock market was reacting positively to the stronger-than-expected results. The
Dow Jones Industrial Average,
S&P 500,
and
Nasdaq Composite
were all climbing on Thursday, and the S&P 500 looks on track to hit its fifth straight record high.
Thursday’s GDP release is the first of three estimates published by the Bureau of Economic Analysis for the fourth quarter and full year. The second and third estimates will come in February and March.
Write to Angela Palumbo at [email protected]
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