The government is expected to report Thursday that U.S. gross domestic product — the economy's total output of goods and services — rose about 2% annually from October to December
From
PAUL WISEMAN ` Business Writer
January 24, 2024, 7:58 p.m. ET
5 minutes read
WASHINGTON – The nation's economy should be in recession by now, weighed down by the highest interest rates in two decades and a resulting collapse in borrowing and spending.
Instead, the U.S. economy continued to chug along. Even more encouraging, inflation, which hit a four-decade high in 2022, has fallen steadily without the painful layoffs that most economists had deemed necessary to slow price rises.
On Thursday, the Commerce Department is expected to report that the country's gross domestic product – the economy's total output of goods and services – rose about 2% annually from October to December.
This would mark a slowdown from the robust 4.9% growth rate in the July-September quarter. Still, it would demonstrate the surprising resilience of the world's largest economy and mark the sixth straight quarter in which GDP grew at a solid annual rate of 2% or more. Contributing to this growth has been steady spending by consumers, whose purchases account for more than two-thirds of the economy.
A year ago, the economic outlook looked much bleaker. As recently as April 2023, an economic model published by the Conference Board, a business group, estimated the probability of a US recession in the next 12 months at almost 99%. The widespread fear was that the Federal Reserve's numerous rate hikes to curb inflation would slow borrowing and spending so much that it would trigger a deep downturn. This typically occurs when the country's central bank has aggressively raised interest rates to combat inflation.
There is now growing optimism that the Fed is on track to engineer a rare “soft landing” — raising lending rates enough to slow growth and hiring and temper price increases, but not so much that the economy goes into a tailspin . A slowdown in GDP growth in the final quarter would be in line with this forecast.
Although inflation has slowed significantly, overall prices are still nearly 17% higher than they were before the pandemic hit three years ago, which has frustrated many Americans. That fact is likely to raise a crucial question for the country's voters, many of whom are still feeling the lingering financial and psychological impact of the worst inflation in four decades. What will have more weight in the presidential election: the sharp decline in inflation or the fact that most prices are significantly higher than three years ago?
The Fed began raising its key interest rate in March 2022 in response to the rebound in inflation that accompanied the economy's recovery from the pandemic recession. When interest rate hikes ended in July last year, the central bank had raised its key interest rate from near zero to about 5.4%, the highest since 2001.
As the Fed's rate hikes impacted the economy, year-on-year inflation slowed to 3.4% last month from 9.1% in June 2022, the highest rate in four decades. That represented a notable improvement, but inflation is still above the Fed's 2 percent target.
Progress to date has come at surprisingly low economic cost. Employers created a whopping 225,000 new jobs per month last year. And unemployment has remained below 4% for 23 consecutive months, the longest such rise since the 1960s.
The once-red-hot labor market has cooled somewhat, easing pressure on companies to raise wages to retain or attract employees and then pass on their higher labor costs to their customers through price increases. It happened in perhaps the least painful way possible: employers generally advertise fewer job openings rather than lay off workers. That's partly because many companies are unwilling to risk losing workers after being caught flat-footed in the economy's recovery from 2020's brief but brutal recession.
Another reason the economy is resilient is that consumers have come through the pandemic in surprisingly good financial shape, in part because tens of millions of households received government stimulus checks. As a result, many consumers have managed to continue spending despite rising prices and high interest rates.
Some economists expect the economy to slow in the coming months as pandemic savings are depleted, credit card usage reaches limits and higher borrowing rates limit spending. Still, the government reported last week that consumers increased their retail spending in December, marking a positive end to the holiday shopping season.
Joe Brusuelas, chief economist at tax and advisory firm RSM, said he believes consumer spending is even stronger than the retail sales report suggests. Brusuelas pointed out that government data “did not adequately capture” increasing holiday spending on travel and other services.
That's why he expects Thursday's GDP report to beat consensus estimates and reach an annual rate of 2.4% – “above the pre-pandemic average, showing a healthy and resilient economy ending the year with “ends on a positive note that most people hadn't predicted just a few months ago.”
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