U.S. GDP rises in Q4, stronger than expected
Economic growth was much stronger than expected in the Commerce Department’s first formal look at Q4 GDP, which came in at 3.3% to close out 2023 on a positive note. The average economist forecast had been calling for growth of around 2.0% over the final three months of last year.
On the surface, the 3.3% advance appears much slower than Q3’s brisk 4.9% pace, but that difference suggests a greater reduction in trend growth than actually occurred. The Q3 number was lifted by an inventory buildup that accounted for 1.3% of that headline growth number; in Q4, inventories were virtually flat. Stripping out that component, the underlying pace of consumption and investment showed much more limited deceleration.
The most telling aspect of the recent trend in GDP lies in personal consumption, which slowed only modestly from Q3 to Q4, dipping from 3.1 to 2.8%. A moderation in goods spending — particularly in higher-ticket durable goods — was the primary driver. Spending on services picked up modestly to 2.4% in the fourth quarter.
Slower spending growth for durable goods reflects a softening in demand that’s at least in part a response to higher interest rates, a reality for consumers that also hit the housing market hard over the past two years. Housing has shown some nascent signs of improvement; while adding virtually nothing to growth in Q4, the silver lining is that it wasn’t an outright drag on the economy in the latter half of 2023 as it had been since mid-2021.
Consumers may have been the catalyst for the unexpectedly strong Q4 advance, but business investment, government spending, and net exports also chipped in meaningfully as well.
Taken alone, unexpectedly strong growth could push back against expectations that the Fed could begin easing in the coming months, but the GDP report provided a shot of good news on the inflation front. Core PCE, which excludes food and energy, increased at a 2.0% annualized pace in Q4, matching its increase in the preceding quarter. The PCE data provides some additional context for inflation’s impact on consumers, standing somewhat in contract to the consumer price index. That reading is still running higher but is expected to decline in the coming months as the impact of slower housing and rent growth filters into the data.
For the Fed, core PCE is a critical benchmark. As evidence mounts that the Powell Fed’s so-called “immaculate disinflation” goal may be coming into view, the potential for interest rate cuts accompanying the economy into a soft landing rather than outright contraction appears to be increasing.
The GDP report, along with other recent data should spark a bit of optimism, but the economy is not out of the woods. Still, there’s at least a more definitive path between the trees that doesn’t lead inevitably to a hard landing. A more pronounced slowdown in job creation or a reacceleration in inflation delaying Fed easing could still cause consumer spending to cool, derailing the key engine of growth for the economy. As has often been the case over time, consumers — specifically their willingness and ability to continue to increase spending at a measured pace — will be critical to keeping the economy on the rails.
The bottom line? Once again, it’s the strength and resiliency of the consumer that carries the day for the U.S. economy. Solid labor market conditions and wage growth coupled with the ability to tap cash and available credit continue to fuel spending. Looking ahead, the continued resiliency of the consumer sector holds the key.
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