US Triumph: The U.S. economy boosted at a blistering 3.3% pace in Q4 while inflation fell

The economy grew considerably faster than expected in the final three months of 2023, while inflation fell, as the United States handily avoided a recession that many forecasts had predicted, the Commerce Department reported Thursday.

Gross domestic product, which measures all goods and services produced, expanded at a 3.3% annualized rate in the fourth quarter of 2023, according to seasonally and inflation-adjusted figures.

This compares to the Wall Street average projection of a 2% growth in the final three months of the year. The third quarter expanded at a 4.9% rate.

In addition to the stronger-than-expected GDP increase, there was some improvement on inflation.

Core prices for personal consumption expenditures, which the Federal Reserve considers as a longer-term inflation indicator, increased by 2% during the period, while the headline rate was 1.7%.

On an annual basis, the PCE price index gained 2.7%, down from 5.9% the previous year, while the core number excluding food and energy increased 3.2%, compared to 5.1%.

The two components together added up to “supersonic Goldilocks, because it’s really a strong number yet inflation hasn’t shown up,” said Beth Ann Bovino, chief economist at US Bank. “Everyone wanted to have fun. People purchased new automobiles, spent a lot of money on recreation, and traveled extensively. We’ve been anticipating a soft landing for some time. This is only one step in that direction.”

The US economy increased at a 2.5% annualized rate during 2023, well ahead of Wall Street’s forecast for little if any growth at the start of the year and better than the 1.9% increase in 2022.

As had been the case throughout the year, a solid rate of consumer spending fueled the expansion. Personal consumption expenditures grew 2.8% in the quarter, a modest decrease from the previous period.

State and local government spending rose 3.7%, while federal government spending increased by 2.5%. Gross private domestic investment increased by 2.1%, contributing significantly to the quarter’s strong performance.

The chain-weighted price index, which takes into account both prices and changes in consumer behavior, rose 1.5% in the quarter, down drastically from 3.3% the previous period and below the Wall Street projection of a 2.5% acceleration.

“This year has been like Rock ‘Em Sock ‘Em Robots, and the economy is knocking the blocks off the economists, always outperforming,” said Dan North, senior economist at Allianz Trade America. Fed Chair Jerome Powell “must be smirking this morning.” Again, he is defying economists’ projections by achieving robust growth and decisively controlling inflation.”

Markets reacted relatively modestly to the report. Stock futures increased modestly, while Treasury yields fell. Futures markets continued to reflect the Fed’s likelihood of implementing its first rate drop in May, albeit the CME Group’s FedWatch gauge pegged the odds of a March cut at 47.4% at about 10 a.m. ET.

“The data was excellent, but the market did not react significantly because GDP is a backward-looking indicator. It told us what happened in October, November, and December,” North explained. “It’s great for historical patterns, but it doesn’t really tell us much about where we’re headed.”

In other economic news. The Labor Department said that initial unemployment claims totaled 214,000 on Thursday, up 25,000 from the previous week and beyond the projection of 199,000. Continuing claims increased by 27,000. They now total 1.833 million.

The GDP data caps a year in which most economists expected the United States to undergo at least a modest recession. Last March, even the Fed expected a small downturn due to stress in the banking industry.

However, a resilient consumer and a strong job market helped propel the economy through the year, which also saw a prolonged decline in manufacturing and a Fed that continued to raise interest rates in its struggle to reduce inflation.

As the calendar changes over to a new year, market expectations have swung away from a recession, with the Fed expected to begin decreasing rates while inflation remains close to its 2% target.

However, concerns remain about the economy’s future issues.

Some of the concerns are about the lag effects of monetary policy, notably the 11 interest rate hikes totaling 5.25 percentage points that the Fed allowed between March 2022 and July 2023. Conventional economic knowledge holds that such policy tightening can take up to two years to work its way through the system, perhaps contributing to future slowdown.

Other concerns revolve around how long people can continue to spend while savings decrease and high-interest loan loads accumulate. Finally, what drives the growth beyond the consumer: Government deficit spending has been a substantial contributor to growth, with the federal IOU at $34 trillion and counting. In the first three months of fiscal 2024, the budget deficit exceeded half a trillion dollars.

There are also political concerns as the United States begins the presidential election campaign, as well as geopolitical concerns stemming from Middle Eastern unrest and the ongoing horrific Ukraine conflict.

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