The U.S. economy slowed in the final three months of 2023 but still delivered a surprisingly strong performance as a rise in consumer spending offset a more modest increase in business investment.
A decline is likely in 2024 as high interest rates and inflation weigh more heavily on growth and a post-pandemic surge in consumption dries up.
The country's gross domestic product, the value of all goods and services produced in the U.S., grew at a seasonally adjusted annual rate of 3.3% in the October-December period, the Commerce Department said Wednesday. That's down from the blistering 4.9% growth in the third quarter, but well above the 2% increase forecast by economists in a Bloomberg survey.
Holiday sales were strong late last year.
How much did the economy grow in 2023?
For all of 2023, the economy grew a whopping 2.5%, defying predictions that the Federal Reserve's aggressive interest rates to combat inflation would plunge the country into recession.
Give credit to consumers whose strong wage increases finally outpaced inflation. Households also continued to rely on a robust but declining pool of COVID-19-related savings.
Is consumer spending increasing?
Consumer spending rose a solid 2.8% at the end of last year, after rising 3.1% in the third quarter. Such purchases account for about 70% of economic activity.
In addition to strong wage growth and savings, households benefited from employment growth, which slowed but still increased by a solid average of 164,000 in the final three months of the year.
Employers are curbing hiring but reluctant to lay off workers after widespread labor shortages related to the coronavirus crisis.
Many economists believe that something has to change this year. Low- and middle-income households have depleted their pandemic reserves and accumulated record levels of credit card debt, while delinquencies have risen to a 13-year high as they grapple with high inflation and borrowing costs.
As a result, some economists believe a mild recession will finally occur this year as layoffs extend beyond well-known companies like Google, Amazon and Wayfair, which have already cut jobs in recent weeks.
The story goes on
On the whole, however, the outlook for 2024 has brightened recently. Inflation has fallen faster than expected, even as consumer spending has remained robust. The slowdown in inflation – from a 40-year high of 9.1% in June 2022 to 3.4% last month – has prompted the Federal Reserve to signal that it has likely completed raising its key interest rate after it had raised it to a 22-year high of 5.25%. to 5.5%.
The S&P 500 index, in turn, closed at another record high on Wednesday, making upper-middle and upper-income Americans feel wealthier and encouraging them to spend more.
Despite strong economic performance in the fourth quarter, consumer prices rose just 2% on an annual basis last quarter, according to the report. That should keep the Fed on track and start cutting interest rates in the spring, says economist Paul Ashworth of Capital Economics.
How likely is a recession in 2024?
According to a Wolters Kluwer Blue Chip Economic Indicators survey this month, forecasters expect the economy to grow 1.6% this year, compared with their estimate of 1.3% in December and 0.8% in August. Such growth likely means the Fed has achieved the coveted “soft landing” by slowing the economy enough to curb inflation without triggering a recession.
Such an outcome could boost President Biden's re-election chances in November, while a collapse could be a major blow. Economists surveyed put the chance of a downturn in 2024 at 42%, still historically high but down from the 61% in May.
Several experts raised their outlook after December retail sales and the holiday season were stronger than expected, giving the economy more momentum at the start of the current quarter.
This is how other sectors of the economy developed:
Business investment is increasing
Business investment rose 1.9%, after rising 1.4% in the previous quarter.
Spending on computers, delivery trucks, factory machinery and other equipment rose just 1% as companies faced higher borrowing costs.
Spending on buildings, rigs and other structures rose 3.2%.
This article originally appeared on USA TODAY: GDP report: Economy slowed in late 2023. Is a recession likely in 2024?
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