By Augusta Saraiva.
Bloomberg News (via TNS).
The U.S. economy's fourth-quarter growth beat forecasts as cooling inflation boosted consumer spending, capping a surprisingly strong year that defied calls for a recession.
According to the government's preliminary estimate released on Thursday, gross domestic product rose 3.3% on an annual basis. For the whole of 2023, the economy grew by 2.5%.
The economy's most important growth engine – private spending – rose by 2.8%. Business investment and housing construction also contributed to last quarter's larger-than-expected increase.
A closely watched measure of underlying inflation rose 2% for the second straight quarter, in line with the Federal Reserve's target, according to the Bureau of Economic Analysis report. The S&P 500 opened higher while Treasury yields were lower as traders focused on inflation numbers, raising the chances of a rate cut in March.
The numbers cap a year in which the economy showed surprising resilience, defying expectations from many Wall Street economists that the country was on the verge of slipping into recession.
Despite the strain on households and businesses from the Fed's interest rate hikes, consumer spending has continued to be driven by sustained job growth and falling inflation.
Ahead of the November election, President Joe Biden may point to the GDP numbers to convince Americans he has done a good job on the economy. Consumer sentiment has also improved in recent months.
Buoyed by better-than-expected holiday spending, fourth-quarter numbers suggest the economy has gained some momentum in the new year, fueling expectations that the expansion is on stronger footing. Nevertheless, growth is likely to weaken this year.
The evolution of inflation and the Fed's response to it will determine the direction the economy takes this year. The longer interest rates remain restrictive, the more economists expect borrowing costs to impact demand and hiring and expansion plans.
“The Fed has already explained why easing makes sense even when economic growth is strong, but not arbitrary rate cuts,” Chris Low, chief economist at FHN Financial, said in a note. “Today’s GDP release, despite being 2023 data, reinforces the logic that leads the Fed to a cautious approach.”
Central bankers are expected to keep interest rates at their highest level in two decades next week, although they have already begun discussing easing monetary policy.
The data suggests that inflation continues to ease. Inflation in the services sector excluding housing and energy, a narrower measure tracked by Fed officials, rose at a rate of 2.6%, the slowest pace since the end of 2020. December figures on inflation, consumer spending and income are due on Expected Friday.
The GDP report showed broad growth in consumer spending, which accounts for about two-thirds of the economy, while spending on goods and services continued to rise. Combined spending on transportation, food and leisure saw the largest increase since the second quarter of 2022.
Beyond healthy spending, which contributed 1.91 percentage points to GDP, business investment contributed 0.26 percentage points. Corporate inventories unexpectedly boosted GDP in the fourth quarter.
For the first time since the beginning of 2021, residential construction investment increased for the second quarter in a row.
Excluding inventories, government spending and trade, inflation-adjusted final sales to private domestic buyers – a key indicator of underlying demand – rose 2.6%.
(With assistance from Kristy Scheuble and Matthew Boesler.)
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