The U.S. economy continued to grow at a healthy pace to end 2023, a year in which unemployment remained low, inflation remained low and a widely predicted 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. That was down from a 4.9 percent rate in the third quarter, but easily topped forecasters’ expectations and showed a resilient recovery from the pandemic’s economic turmoil.
The latest reading is preliminary and may be revised in the coming months.
Forecasters entered 2023 expecting an aggressive Federal Reserve campaign of interest rate hikes to push the economy into headwinds. Instead, growth accelerated: For the full year, measured from the end of 2022 to the end of 2023, gross domestic product grew by 3.1 percent, up from less than 1 percent a year earlier and well below the pre-pandemic level. Was faster than any of the previous five years. (A different measure based on average output over the entire year showed annual growth of 2.5 percent in 2023.)
There is also little sign that a recession is coming this year. Early forecasts point to continued growth, albeit at a slower pace, in the first three months of 2024. Layoffs remain low, and job growth remains steady. Lower inflation means wages are rising faster than prices again. And consumer sentiment is finally showing signs of rebounding after years of recession.
“It’s hard to imagine how things could look any better given a soft landing,” said Brian Rose, senior economist at UBS. “Looking at last year, the combination of growth and inflation that we had was not considered within the realm of possibility by most people. Even the optimists were not so optimistic about such strong growth, low unemployment and inflation coming down so quickly.”
Fourth quarter data provided more evidence that the recovery remains on solid footing. Consumer spending, the backbone of the U.S. economy, grew at an annual rate of 2.8 percent, marginally slower than the previous quarter. The housing sector, which was hit by higher interest rates in 2022 and early 2023, grew modestly for the second consecutive quarter. Businesses increased their investment on equipment. Personal income rose faster than prices as workers continued to benefit from the strong job market.
Perhaps most importantly, inflation remained stubbornly cool: Consumer prices rose at an annual rate of 1.7 percent in the last three months of the year, below the Fed’s long-term target of 2 percent. (Measured from a year earlier, prices were up 2.7 percent.) This isn’t just good news for households suffering from two years of rapidly rising prices; It also makes a recession less likely, as it gives Fed policymakers more flexibility to cut interest rates to keep the recovery on track.
“Even if we see some signs of recessionary forces, the Fed may be able to respond quite quickly,” said Aichi Amemiya, senior economist at Nomura.
The risk remains. Consumers have increasingly financed their spending with credit cards and other forms of borrowing, such as “buy now, pay later” loans, which may prove unsustainable, especially if the job 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 domestic consequences.
Such threats are not deterring investors, who have driven the stock market to record highs. And businesses also appear to be becoming more confident, increasing their investments after spending a year bracing for a potential recession.
“I think the fears of the economy slipping into recession are now behind us and it looks like businesses are planning for growth,” said Ben Herzon, economist at S&P Global Market Intelligence.
The surprising strength of the recovery in 2023 has led some economists to question how their forecasts were so wrong.
One possibility is that they failed to see how the pandemic had rewritten the rules of the economy. The Fed has struggled in the past to reduce inflation without increasing unemployment. But this time, the rapid rise in consumer prices was at least in part due to the disruptions caused by the pandemic — and as those disruptions have eased, 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. “Perhaps the mistake was to rely too much on history and too much on models.”