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The US economy saw dizzying growth in the fourth quarter

Washington, D.C.

The U.S. economy remained incredibly robust in the fourth quarter, capping a remarkably strong 2023 as consumers and businesses continued to spend, dashing expectations of a recession.

Gross domestic product, the broadest measure of economic output, grew at an inflation- and seasonally adjusted annualized rate of 3.3% from October to December, the Commerce Department reported Thursday.

That’s slower than the blistering 4.9% rate recorded from July to September, when U.S. consumers invested in services and goods. Overall growth in 2023, from January to December last year, recorded a robust rate of 2.5%.

But the fourth-quarter rate exceeded the 1.5% expected by economists, according to FactSet estimates. The economy’s strength in the final months of 2023 was broad-based, driven by consumer spending, business investment, government spending, exports and improving housing conditions.

Consumer spending, which accounts for about two-thirds of the U.S. economy, grew at a healthy rate of 2.8% in the fourth quarter, a slightly slower pace than the 3.1% rate during the three months. previous ones. At the same time, business spending accelerated to 1.9%, up from 1.4%.

“The outlook is good and the economy will continue to perform well this year,” Scott Hoyt, senior director of Moody’s Analytics, said in a statement. “Consumers are doing their part and spending just enough to support broader economic growth. »

The GDP report released Thursday shows that the U.S. economy has slowed somewhat in recent months, but it is unclear whether that slowdown has been enough to keep the Federal Reserve on track to cut interest rates. interest in the near future.

Fed Governor Christopher Waller, an influential central bank official, said in a speech earlier this month that if “the economic activity that appears to have moderated in the fourth quarter of 2023 does not materialize,” it would could delay rate cuts. Market expectations for this first rate cut in March have collapsed in recent weeks.

A robust economic landscape for now

As the United States prepares for a presidential election, the latest GDP figures provide further evidence that the economy is far from recession territory.

Americans continue to open their wallets and American consumer confidence is soaring, mainly thanks to slowing inflation. This comes on top of a rally in the U.S. stock market that is strengthening Americans’ retirement accounts.

It all paints a stark picture of a robust economic landscape, one that should improve President Joe Biden’s mediocre ratings on the economy in polls, economists say. In separate speeches Thursday, Biden and Treasury Secretary Janet Yellen are expected to tout the strong economy while noting that there are still inequalities to be addressed.

“President Biden and I believe that GDP growth is meaningless if it is not shared; if it doesn’t impact the lives of these Americans,” Yellen said in prepared remarks.

Economists and Fed officials generally expect the U.S. economy to slow this year compared to 2023, but not contract. This means the Fed still has a good chance of beating inflation without massive job losses, known as a soft landing.

“We continue to view a soft landing as the most likely outcome this year, although a combination of headwinds and risks means the chances of recession are around 35%,” wrote Lydia Boussour, senior economist at EY-Parthenon, in a note Thursday.

“While there is no doubt that the economy is still on a roll, we believe cooler days are on the horizon,” she added.

Although the GDP report showed growth remained robust in the fourth quarter, it also showed no worrying signs of inflation picking up.

The price index for personal consumption expenditures excluding food and energy prices, a closely watched measure of core inflation, remained stable at 2% between October and December for the second consecutive quarter. This is exactly the Fed’s official goal.

Still, Fed officials said they would likely need “below-trend growth” to be assured that inflation would be sustainably contained. The Fed’s mechanism for slowing inflation is to deliberately cool the economy by raising interest rates, which are currently at their highest level in 23 years.

Fed officials meet in Washington next week for their final monetary policy meeting, and are widely expected to keep rates steady for the fourth straight meeting.

Next week’s slew of economic news — from Fed Chairman Jerome Powell’s press conference to the first jobs report of 2024 — should help clarify the narrative about what the Fed is likely to do in spring.

“A March rate cut appears less likely, but investors will still have several key reports ahead of them in the coming weeks,” Jeffrey Roach, chief economist at LPL Financial, said in a note.

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