The U.S. economy grew at a slower but solid clip in the final three months of 2023, capping a robust year if economists are correct in their predictions.
Forecasters across the board expect the seasonally adjusted annual rate of gross domestic product in the fourth quarter to come in lower than the third quarter’s 4.9% final reading. That growth marked a steep acceleration from the second quarter’s 2.1% increase and took many by surprise.
Economists surveyed by FactSet estimate the U.S. economy grew by 1.5% in the fourth quarter. Both the Federal Reserve Bank of Atlanta’s GDPNow and the New York Fed Staff Nowcast models put the number higher, at 2.4%, based on recent positive economic data.
For the entire year, economists see growth of 2.4%, an increase from 2022’s 2.1% growth.
“Incoming data continue to point to a resilient, but cooling, U.S. economy, led by consumer spending on the back of a tight labor market, higher than expected holiday spending, and moderately strong balance sheets,” BofA Securities economist Shruti Mishra wrote in a research note Monday. She forecasts growth of 1.5% in the fourth quarter.
Despite high interest rates and inflation, American consumers have been strong. Consumer sentiment at the beginning of January jumped to its highest reading since July 2021 last week, according to the University of Michigan. Retail sales for December came in above expectations too. December’s unemployment was 3.7%, near a historic low.
“Consumption should remain supported as long as the labor market remains healthy,” Citi economist Veronica Clark, who forecasts 2% growth in the fourth quarter, wrote in a note Tuesday.
There are some areas of softening growth.
BofA’s Mishra said growth in nonresidential fixed investments, or spending on commercial structures and equipment, likely declined in the quarter. Nonresidential fixed investments increased 1.4% in the third quarter, which was a deceleration from 7.4% growth in the second quarter.
Clark flags housing as another area to watch. “Home sales have been limited partly by lack of supply of homes to buy over the last year, with higher mortgage rates through October also weighing further on sales in [the fourth quarter],” Clark said.
Investors will also get a read on fourth-quarter and full-year 2023 inflation in Thursday’s GDP report. The core personal-consumption expenditures price index, the Federal Reserve’s preferred inflation gauge because it excludes volatile food and energy prices, was 2% throughout the third quarter.
The Fed is targeting inflation of 2%. On Friday, the Bureau of Economic Analysis will release December’s PCE numbers. Economists project core inflation rose 3% year over year in the month.
The estimates projections suggest that the Fed has, so far, been successful in taming inflation while avoiding a recession. That has led investors to believe that the central bank can cut rates soon. CME’s FedWatch Tool on Wednesday indicated that traders see the Fed cutting rates at its May meeting.
Thursday’s GDP release, due out at 8:30 a.m. Eastern time, is the first of three estimates published by the Bureau of Economic Analysis for the fourth quarter and full year. The second and third estimates will come in February and March.
Write to Angela Palumbo at [email protected]
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