The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and the widely predicted recession failed to materialize.
Inflation-adjusted gross domestic product grew 3.3 percent annually in the fourth quarter, the Commerce Department said Thursday. That was down from the 4.9 percent in the third quarter, but comfortably exceeded forecasters’ expectations and showed the resilience of the recovery from the economic turmoil of the pandemic.
The latest reading is preliminary and may be revised in the coming months.
Heading into 2023, forecasters expected the Federal Reserve’s aggressive interest rate hike campaign to send the economy into reverse gear. Instead, growth accelerated: For the full year, measured from the end of 2022 to the end of 2023, GDP grew by 3.1 percent, up from less than 1 percent the year before and faster than the average for the five years before the pandemic. (Another measure, based on full-year average production, showed annual growth of 2.5 percent in 2023.)
“Stunning and spectacular,” Diane Swonk, chief economist at KPMG, said of the latest data. “We will get the win.”
This year, too, there are few signs that a recession is imminent. Initial forecasts point to continued – albeit slower – growth in the first three months of 2024. Layoffs remain low and job growth has remained stable. The cooling of inflation has led to wages rising faster than prices again. And consumer sentiment is finally showing signs of recovery after years of doldrums.
“It’s hard to imagine how things could look better after the soft landing,” said Brian Rose, senior economist at UBS. “When we look back at last year, most people didn’t think the combination of growth and inflation was possible. Even the optimists were not so optimistic about having such strong growth, low unemployment and such a rapid decline in inflation.”
Fourth quarter data provided further evidence that the recovery remains on solid footing. Consumer spending, the bedrock of the U.S. economy, grew at an annual rate of 2.8 percent, only slightly slower than in the previous quarter. The real estate sector, which suffered from high interest rates in 2022 and early 2023, grew moderately for the second quarter in a row. Companies increased their investments in equipment. Personal income rose faster than prices as the strong labor market continued to benefit workers.
Perhaps most significantly, inflation continued to cool: Consumer prices rose at an annual rate of 1.7 percent in the final three months of the year, below the Fed’s long-term target of 2 percent. (Prices rose 2.7 percent year-over-year.) This isn’t just good news for households that have suffered from two years of soaring prices; It also reduces the likelihood of a recession by giving Fed policymakers more flexibility to cut interest rates to keep the recovery on track.
“Even if we see some signs of recessionary forces, the Fed could be able to react quite quickly,” said Aichi Amemiya, senior economist at Nomura.
President Biden hailed the latest data on Thursday as evidence that his economic policies were working.
“Wages, wealth and employment are now higher than before the pandemic,” he said in a statement. “This is good news for American families and American workers.”
Risks remain. Separate data on Thursday showed that new jobless claims rose last week. Consumers are increasingly financing their spending with credit cards and other forms of borrowing, such as buy now, pay later loans, which could prove unsustainable, especially if the job market weakens. High interest rates continue to impact the economy, and developments abroad – from conflict in the Middle East to economic weakness in China – could have consequences at home.
Such threats do not appear to faze investors, who have driven the stock market to record highs. And companies also appear to be becoming more confident and are increasing their investments after a year of preparing for a possible downturn.
“I think fears that the economy could slip into recession are largely over us, and it looks like companies are planning for growth,” said Ben Herzon, an economist at S&P Global Market Intelligence.
Mike Stasko Jr. expected last year that things would be difficult for Sunny Street Cafe, the chain of breakfast restaurants where he is head of brand strategy.
“This time last year there was some hand-wringing,” he said. The Ohio company, which has 10 locations and another dozen franchisee-owned, decided to delay its expansion plans to see how high interest rates and a possible recession would affect its business.
However, within a few months it became clear that Sunny Street continued to thrive. Business wasn’t growing as quickly as in the hectic days after pandemic lockdowns were lifted, but customers were still eating out and the slightly cooler job market made hiring easier. It didn’t hurt that the rise in egg prices eased over the year in late 2022 and early 2023. By the middle of the year, the company was back in expansion mode.
“We just had nice, steady, predictable growth over the year, which is exactly what you want,” Mr. Stasko said. “From our perspective, it was a great year.”
For many businesses, the hectic pace of the early reopening phase has been replaced with something that feels more sustainable. Employees are less likely to change jobs, which gives them time to grow in their jobs. The technologies and business model changes introduced in the wake of the pandemic have become more widely known. Demand has become more predictable. All of this led to improved productivity and enabled faster growth with lower inflation.
Ms. Swonk compared the current moment to the late 1990s, when strong productivity growth led to rising wages across the income spectrum.
“It’s something very reminiscent of the 1990s boom,” she said. “We’ll see whether it can continue or not.” But it’s something to celebrate.”
This was also something few economists expected, leading some of them to question why their forecasts were so wrong.
One possibility is that they failed to recognize how the pandemic has rewritten the rules of the economy. The Fed has historically struggled to reduce inflation without driving up unemployment. But this time, the rapid rise in consumer prices was at least partly due to disruptions caused by the pandemic — and as those disruptions have eased, so has inflation.
“This cycle is historically unique; “We’ve never had a global pandemic before,” said Michael Gapen, chief U.S. economist at Bank of America. “Perhaps the mistake was relying too much on history and too much on models.”
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2024-01-25 17:14:06
www.nytimes.com
