The U.S. economy continued to grow at a healthy pace in late 2023, capping a year in which unemployment remained low, inflation subsided and the widely predicted recession never materialized.
Gross domestic product, adjusted for inflation, grew at an annual rate of 3.3 percent In the fourth quarter, the Commerce Department announced Thursday. This figure is down from the third quarter’s rate of 4.9%, but far exceeds forecasters’ expectations and shows the resilience of the recovery from the economic upheaval caused by the pandemic.
The latest reading is preliminary and may be reviewed in the coming months.
Forecasters entered 2023 expecting the Federal Reserve’s aggressive interest rate hike campaign to set the economy back. Instead, growth accelerated: for the year as a whole, measured from the end of 2022 to the end of 2023, GDP increased by 3.1 percent, compared to less than 1 percent the previous year and faster than the average of the five years preceding the pandemic. (A different measure, based on average production over the entire year, showed annual growth of 2.5% in 2023.)
“Astonishing and spectacular,” Diane Swonk, chief economist at KPMG, said of the latest data. “We will achieve victory.”
There is also no indication that a recession is imminent this year. Early forecasts point to continued – albeit slower – growth in the first three months of 2024. Layoffs remain low and job growth has remained stable. The slowdown in inflation has caused wages to rise again faster than prices. And consumer confidence is finally showing signs of rebounding after years of sluggishness.
“It’s hard to imagine how things could improve after a soft landing,” said Brian Rose, senior economist at UBS. “Looking back at last year, the combination of growth and inflation that we experienced was not considered feasible by most people. Even the optimists were not optimistic about such strong growth, low unemployment and such rapid inflation.”
Fourth-quarter data provided further evidence that the recovery remains strong. Consumer spending, the bedrock of the U.S. economy, grew at an annual rate of 2.8 percent, only slightly slower than the previous quarter. The real estate sector, which has been hit by high interest rates in 2022 and early 2023, saw modest growth for the second consecutive quarter. Companies have stepped up their investments in equipment. Personal incomes grew faster than prices as a strong labor market continued to benefit workers.
Perhaps most importantly, inflation continued to cool: consumer prices rose at an annual rate of 1.7 percent in the last three months of the year. , below the Fed’s long-term goal of 2 percent. (Measured against the previous year, prices rose 2.7 percent.) That’s not just good news for households battered by two years of rapidly rising prices; It also makes a recession less likely, because it gives Fed policymakers more flexibility to cut interest rates to keep the recovery on track.
“Even if we see signs of recessionary forces, the Fed may be able to respond relatively quickly,” said Aichi Amemiya, senior economist at Nomura.
President Biden on Thursday hailed the latest data as proof that his economic policies were working.
“Wages, wealth and employment are higher today than they were before the pandemic,” he said in a statement. “This is good news for American families and American workers.”
Risks remain. Separate data released Thursday showed that new applications for unemployment benefits increased 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. 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 domestic consequences.
Such threats do not appear to deter investors, who have pushed the stock market to record highs. Businesses also appear increasingly confident, stepping up their investments after a year of investing in anticipation of a possible downturn.
“I think the fears of a recession in the economy are now behind us and it appears that companies are planning for growth,” said Ben Herzon, economist at S&P Global Market Intelligence.
Mike Stasko Jr. started last year expecting it to be a tough year for Sunny Street Cafe, the breakfast restaurant chain where he is responsible for brand strategy.
“This time last year there were concerns,” he said. The Ohio company, which has 10 locations and a dozen more franchise-owned locations, decided to postpone its expansion plans to see how high interest rates and a possible recession would affect its business.
But after a few months, it became clear that Sunny Street was continuing its development. Business wasn’t growing as quickly as in the frenetic days after pandemic lockdowns were lifted, but customers continued to eat out and the slightly colder job market made hiring easier. It didn’t hurt that the surge in egg prices in late 2022 and early 2023 eased as the year progressed. By mid-year, the company was back in expansion mode.
“We’ve kind of had nice, steady, predictable growth over the year, which is exactly what you want,” Mr. Stasko said. “From our point of view, it was a great year.”
For many businesses, the frenetic pace of the early reopening period has been replaced by something that feels more sustainable. Workers don’t change jobs as often, giving them time to improve in their jobs. Technologies and business model shifts adopted during the pandemic have become more familiar. Demand has become more predictable. All of this led to improved productivity, enabling faster growth with less inflation.
Ms. Swonk appreciates the current situation, in the late 1990s, where strong productivity growth led to rising wages across the income spectrum.
“There’s something very reminiscent of the 1990s boom,” she said. “Whether or not this can continue, we’ll see. But it’s something to celebrate.
It’s also something that few economists saw coming, leading some of them to wonder why their predictions were so wrong.
They may not have understood how the pandemic had rewritten the rules of the economy. The Fed has struggled in the past to bring down inflation without driving up unemployment. But this time around, the rapid rise in consumer prices was driven, at least in part, by the disruptions caused by the pandemic — and as those disruptions eased, so did 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. “Maybe the fault was relying too much on history and too much on models.”