The U.S. economy continued to grow at a healthy pace into late 2023, ending a year in which unemployment remained low, inflation cooled and a widely anticipated 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 said Thursday. This was down from the 4.9 percent rate in the third quarter, but easily beat forecasters’ expectations and showed the resilience of the recovery from the economic turmoil of the pandemic.
The latest reading is preliminary and may be reviewed in the coming months.
Forecasters entered 2023 expecting the Federal Reserve’s aggressive campaign of interest rate hikes to set the economy back. Instead, growth accelerated: For the full year, measured from the end of 2022 to the end of 2023, GDP grew 3.1 percent, up from less than 1 percent the previous year and faster than in any of the the five years before the pandemic. (A different measure, based on average production throughout the year, showed annual growth of 2.5 percent in 2023.)
“Stunning and spectacular,” Diane Swonk, chief economist at KPMG, said of the latest data. “We will take the victory.”
There are no signs that a recession is imminent this year, either. 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 cooling of inflation has meant that wages are once again rising faster than prices. And consumer confidence is finally showing signs of recovery after years of stagnation.
“It’s hard to see how things could improve with a soft landing,” said Brian Rose, senior economist at UBS. “Looking back last year, most people didn’t think the combination of growth and inflation that we had was possible. “To have such strong growth, low unemployment, and inflation coming down so quickly, even the optimists weren’t that optimistic.”
Fourth-quarter data provided further evidence that the recovery remains on solid footing. 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 was hit by high interest rates in 2022 and early 2023, grew modestly for the second consecutive quarter. Companies increased their investments in equipment. Personal incomes rose faster than prices as the strong labor market continued to benefit workers.
Perhaps most significantly, inflation continued to cool: Consumer prices rose at an annual rate of 1.7 percent in the final three months of the year, below the Federal Reserve’s long-term goal of 2 percent. (Compared to the previous year, prices rose 2.7 percent.) This isn’t just good news for households hit 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 and keep the recovery on track.
“Even if we see some signs of recessionary forces, the Fed could respond quite quickly,” said Aichi Amemiya, senior economist at Nomura.
President Biden applauded Thursday’s latest data as proof that his economic policies were working.
“Wages, wealth and employment are higher now than before the pandemic,” he said in a statement. “That’s good news for American families and workers.”
The risks remain. Separate data from Thursday showed that New applications for unemployment benefits increased last week. Consumers have increasingly financed their spending with credit cards and other forms of borrowing, such as “buy now, pay later” loans, which could prove unsustainable, especially if the labor market weakens. High interest rates continue to weigh on the economy, and developments abroad – from conflict in the Middle East to economic weakness in China – could have consequences at home.
These threats do not seem to faze investors, who have driven the stock market to record levels. And companies also appear to be gaining confidence, increasing their investments after a year preparing for a possible recession.
“I think fears that the economy was going to fall into a recession are pretty much behind us, and it looks like companies are planning to grow,” said Ben Herzon, economist at S&P Global Market Intelligence.
Mike Stasko Jr. entered last year expecting it to be a tough year for Sunny Street Cafe, the breakfast restaurant chain where he is chief brand strategy officer.
“Last year around this time there was some concern,” he said. The Ohio company, which owns 10 locations and has another dozen owned by franchisees, decided to postpone expansion plans to see how high interest rates and a possible recession would affect its business.
However, within a few months it was clear that Sunny Street was still thriving. Business wasn’t growing as fast as in the frenetic days after pandemic lockdowns were lifted, but customers were still eating out and the slightly cooler job market made hiring easier. It didn’t hurt that the surge in egg prices in late 2022 and early 2023 faded as the year progressed. In the middle of the year, the company returned to the expansion phase.
“We had that nice, steady, predictable growth throughout the year, which is exactly what you want,” Stasko said. “From our perspective, it was a great year.”
For many businesses, the frenetic pace of the early reopening period has been replaced by something that seems more sustainable. Workers don’t change jobs as frequently, giving them time to get better at the jobs they have. The technologies and changes in business models adopted during the pandemic have become more familiar. Demand has become more predictable. All of that led to higher productivity, allowing for faster growth with less inflation.
Swonk compared the current moment to the late 1990s, when strong productivity growth fueled rising wages across the income spectrum.
“There is something very reminiscent of the boom of the ’90s,” he said. “We’ll see if this can continue or not. But it is something to celebrate.”
It’s also something that few economists saw coming, leading some of them to wonder how their forecasts were so wrong.
One possibility is that they didn’t see how the pandemic had rewritten the rules of the economy. The Federal Reserve has struggled in the past to reduce inflation without increasing unemployment. But this time, the rapid rise in consumer prices was driven, at least in part, by shocks caused by the pandemic, and as those shocks have subsided, so has 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 mistake was relying too much on history and too much on models.”
