The U.S. Bureau of Economic Analysis said Thursday that the economy grew much faster than expected in the final months of 2023, driven by strong consumer spending and expanding government budgets.
Gross domestic product (GDP), the government's broadest measure of the economy, grew at an annual rate of 3.3%, adjusted for inflation, in the fourth quarter.
Economists had expected the economy to grow by 2% in the October-December period. Even with the most bullish forecast, growth in the fourth quarter was only 2.5%.
After adjusting for inflation, economic growth last quarter was 4.9%.
Real GDP, measured from Q4 2022 to Q4 2023, increased by 3.1%.
The rapid pace of growth in the fourth quarter could overturn the Fed's expectations for rate cuts earlier this year. Fed officials believe the economy will need a period of “below-trend” growth (about 1.8%) for inflation to fall sustainably to the central bank's 2% goal. Stated.
Economists have been debating this year whether a “soft landing”, defined as a sustained decline in inflation to 2% while the economy continues to grow at a steady pace, can be achieved. Some believe the economy is heading for a “hard landing” – a slowdown in growth or a recession as inflation falls. A third view is a “no-go” view, where the economy continues to grow above trend and inflation does not fall sustainably to the Fed's target.
The strong pace of growth in the second half of 2023 suggests that soft-landing and no-landing scenarios are more likely than hard-landing predictions.
Economic growth in the fourth quarter, before adjusting for inflation, was 4.8%. This was a slowdown from the nominal growth rate of 8.3% in the third quarter.
The U.S. economy expanded by 2.5% for the full year in 2023, up from 1.9% a year earlier. The economic growth rate before adjusting for inflation was 6.3% last year and 9.3% the year before.
Growth in the fourth quarter was boosted by increases in consumer spending, exports, government spending, business investment and housing investment. Consumers spent more on both goods and services. Overall, consumer spending grew at an annualized rate of 2.8%, faster than expected 2.5% growth and far behind the impressive 3.1% growth seen in the third quarter.
In terms of services, the increase was driven by increased spending on eating out and housing. In terms of goods, spending on medicines, recreational supplies, and automobiles led the increase in spending.
Oil and financial services led the increase in exports.
Government spending rose 4.3% last year, adjusted for inflation. Compared to the previous quarter, government spending rose 3.3% in the fourth quarter, slowing from the 5.8% quarterly growth rate in the third quarter.
Federal government spending in 2023 will increase by 4%, with non-defense spending increasing by 4.7% and defense spending increasing by 3.3%. State and local government spending increased 4.5%.
