at sometime US economic growth will disappoint expectations. However, for now, it appears to have ended 2023 just as it has ended the past few years, with another expansion that defied expectations. Recent data suggests the economy grew at an annual rate of 2.5% or so in the final three months of the year, more than double analysts’ average forecast at the start of the quarter.
Although this momentum is welcome, it further complicates the outlook as the Fed considers the right time to start cutting interest rates. America’s power is broad-based. Investment in manufacturing facilities has risen to record levels, driven by the Biden administration’s subsidies for electric vehicle and semiconductor production. High mortgage rates led to significant declines in existing home sales, but real estate developers responded to the scarcity of single-family homes on the market by ramping up construction. The government remained supportive of growth – albeit a worrying one from the point of view of long-term fiscal sustainability – with its deficit reaching around 7% of GDP. gross domestic productwhich is almost unprecedented during peacetime without a recession.
Most important of all, American consumers have remained indomitable, defying expectations of reduced personal spending. Two factors help explain their resilience. Thanks to the government’s fiscal generosity, the stock of savings that households have accumulated during the COVID-19 pandemic has continued to protect them. Economists at the Federal Reserve Bank of San Francisco believe that households have about $290 billion in excess savings, relative to the projected baseline, as of November. Moreover, a tight labor market has led to strong wage growth, especially for low-income workers, who in turn have a greater propensity to spend. With inflation controlled, real wage gains appear more significant.
These various sources of strength contributed to America’s tumultuous third quarter in 2023, when it recorded annual growth of 4.9%. Some slowdown was normal after such rapid expansion. As recently as early October, analysts expected growth of just 0.7% in the fourth quarter of 2023. But the latest reading from a real-time model prepared by the Federal Reserve Bank of Atlanta — which has proven to be a reliable guide to recent research gross domestic product The numbers – instead indicate annual growth of 2.5%. Although the reading will fluctuate as more data flows in, the margin of error shrinks as a date appears gross domestic product The release is approaching. The next one is January 25th. For 2023 as a whole, growth is likely to be around 2.5%, which is impressive considering that most economists expected America to be on the verge of recession.
What makes the growth even more surprising is that it came at the same time as inflation eased. The Fed’s preferred measure of inflation – personal consumer spending (Personal consumption expenditures) – reached 2.6% in November compared to the previous year, down from 7% in mid-2022. Even more encouraging, fundamental Personal consumption expenditures Prices, which exclude volatile food and energy costs, rose just 2.2% year over year over the past three months, in line with the Fed’s 2% target. The decline in inflation was driven by lower commodity prices as supply chains recovered from pandemic disruptions.
This has created a best-of-both-worlds scenario: resilient growth and vanishing inflation. Such a favorable combination may allow the Fed to cut interest rates in the coming months, not because growth is weakening, but because it wants to avoid excessive monetary restrictions. Fed Chairman Jerome Powell appeared to give voice to these hopes after the central bank’s mid-December meeting, when he said that interest rate cuts “may just be a sign that the economy is starting to normalize and does not need hawkish policy.” . His words caused stock and bond prices to rise.
However, strong growth suggests a less pleasant scenario: that low inflation is a false signal. While commodity prices have fallen, prices for many services continue to rise faster than their pre-pandemic trend. Home prices actually rebounded in 2023, despite mortgage rates rising to 8%, their highest level in two decades. With mortgage rates falling below 7% in December, the possibility of a further acceleration in the real estate market looms on the horizon. Easing financial conditions as a result of interest rate cuts would support economic growth but could also lead to renewed price pressures.
If inflation rebounds, the Fed will have no choice but to keep interest rates high, perhaps reviving recession fears that have all but faded away. These risks help explain why New York Fed President John Williams poured cold water on the hottest speculation about impending interest rate cuts in the wake of Powell’s comments last month. “It’s too early to even think about that,” he added. Perhaps it is also too early to celebrate America’s escape from the brutal inflation that has prevailed over the past few years without causing any significant damage to its economy. ■