The US economy grows more than expected at the end of 2023, driven by consumer spending

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The U.S. economy grew an unexpected 3.3 percent annually between October and December, with Americans still willing to spend freely despite high interest rates and price levels that have frustrated many households.

The report released Thursday by the U.S. Commerce Department said gross domestic product — the economy’s total output of goods and services — slowed from its blistering 4.9 percent growth rate in the previous quarter. But the latest figures still reflect the surprising durability of the world’s largest economy, marking the sixth consecutive quarter in which GDP grew at an annual rate of 2 percent or more.

Consumers, who make up about 70 percent of the total U.S. economy, drove fourth-quarter growth. Their spending increased at an annual rate of 2.8 percent, on items ranging from clothing, furniture, recreational vehicles and other goods to services like hotels and restaurant meals.

The GDP report also showed that despite the robust pace of growth in the October-December quarter, inflation continued to slow in the United States. Consumer prices rose at an annual rate of 1.7 percent, compared to 2.6 percent in the third quarter. And if we exclude the volatility of food and energy prices, so-called core inflation rose at an annual rate of 2 percent.

Shoppers browse in a supermarket while wearing masks to help slow the spread of coronavirus disease (COVID-19) in north St. Louis, Missouri.
Inflation has remained high for consumers in the United States, although it has declined in recent months. (Lawrence Bryant/Reuters)

The state of the economy will certainly weigh on people’s minds as the US presidential elections approach in November. After a long period of gloom, Americans are starting to feel a little better about inflation and the economy — a trend that could support consumer spending, fuel economic growth and potentially affect voters’ decisions. A measure of consumer confidence by the University of Michigan, for example, saw the largest increase over the past two months since 1991.

US inflation falls, economy expands

There is growing optimism that the Federal Reserve is on track to achieve a rare “soft landing” – raising borrowing rates enough to dampen growth, hiring and inflation, without however, cause the economy to plummet.

Inflation hit a four-decade high in 2022, but has since fallen steadily without the painful layoffs that most economists thought would be needed to slow accelerating prices.

The economy has repeatedly defied predictions that the Fed’s aggressive interest rate hikes would trigger a recession. Far from collapsing last year, the US economy accelerated by 2.5 percent, compared to 1.9 percent in 2022.

“We continue to expect continued expansion in economic activity over the coming quarters,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

Ultimately, she warned, higher borrowing rates could dampen consumer spending and gross domestic product. But she added that “there could be benefits for economic growth as the Fed begins to cut rates this year and financial and credit conditions ease.”

The economic outlook seemed much bleaker a year ago. As recently as April 2023, an economic model released by the Conference Board, a business group, put the likelihood of a U.S. recession in the next 12 months at nearly 99%.

Prices still high, unemployment still low

Even though U.S. inflation has slowed significantly, overall prices remain nearly 17 percent higher than they were before the pandemic erupted three years ago.

The Fed began raising its benchmark rate in March 2022 in response to the resurgence of inflation that accompanied the economy’s recovery from the pandemic recession. By the end of its hikes in July last year, the central bank had raised its interest rate from near zero to around 5.4 percent, the highest level since 2001.

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As the Fed’s rate hikes rippled through the economy, year-over-year inflation slowed from 9.1% in June 2022, the fastest rate in four decades, to 3.4% in June 2022. last month. That marks a striking improvement, but still leaves this inflation measure above the Fed’s 2 percent target.

The progress made so far has come at a surprisingly low economic cost. Employers created 225,000 jobs per month over the past year. And unemployment has remained below 4 percent for 23 straight months, the longest such streak since the 1960s.

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