US GDP beat expectations in fourth quarter to end resilient 2023

Solid economic growth came as consumer sentiment about economy brightens

The New York Stock Exchange. The increase in GDP reflected increases in consumer and government spending, exports, and commercial and private inventory investment. AFP

US economic growth beat expectations last month, capping a year in which it defied continuing fears that the country would enter a recession.

Gross domestic product grew at a 3.3 per cent annual rate from October to December, down from the third quarter's bumper reading of 4.9 per cent, the Commerce Department reported on Thursday.

Despite the slowdown, economic growth still defied expectations. Economists surveyed by The Wall Street Journal projected GDP to grow at an annualised rate of 2 per cent in the last quarter.

The increase in GDP reflected increases in consumer and government spending, exports, commercial and private inventory investment.

For the year, real GDP increased by 2.5 per cent, up from 1.9 per cent in 2022, the Commerce Department said.

Thursday's report stands in stark contrast to what economists had projected at the beginning of last year, where the cloud of a possible recession loomed over the US economic outlook.

Instead, consumer spending remained resilient in the face of high interest rates imposed by the Federal Reserve.

Meanwhile, inflation declined considerably last year, while the unemployment rate remained at a near-historic low. Strong economic growth, moderating inflation and a resilient labour market have all added to expectations that the Fed will achieve a rare soft landing.

By raising interest rates to their current 5.4 per cent level, the Fed has sought to tame inflation without unemployment rising. Inflation is currently sitting at 3.4 per cent, compared with 9.1 per cent in 2022.

Underlying data in the Commerce Department's report also showed that the Personal Consumer Expenditures (PCE) Price Index increased 1.7 per cent in the fourth quarter, down from 2.6 per cent.

Core PCE, which excludes food and energy, was unchanged at 2.0 per cent.

PCE inflation data for December is scheduled to be released on Friday.

With a soft landing coming into view, the conversation about the Fed's interest rates has changed to when and by how much it will cut them. Projections from the central bank anticipate three quarter-rate cuts this year, although the timing remains uncertain.

Markets have shifted their estimation on the first rate cut, now projecting a quarter-rate cut in May as opposed to March.

Consumers are feeling much better about the economy now, too.

Consumer sentiment reached its highest level since July 2021 on the belief that the inflation battle has turned a corner and incomes are stronger, according to a University of Michigan survey published last week.