In the last quarter of the year, the US economy faced an unexpected slowdown, exceeding expectations and enhancing optimism about avoiding a recession. Despite the slowdown, performance exceeded forecasters’ expectations.
US GDP Growth and Soft Landing Prospects
The US Department of Commerce reported 3.3% annual growth in gross domestic product, adjusted for inflation, during the fourth quarter of the previous year. Although growth slowed compared to the previous quarter, it exceeded economists’ expectations by more than a percentage point.
Core price increases, excluding volatile food and energy costs, rose 1.9%, in line with the Federal Reserve’s inflation target. These data reinforce optimism that the United States may achieve “Soft landing“, as price increases return to normal and economic growth continues, thus avoiding economic contraction.
Growth in the fourth quarter of the year was largely driven by higher consumer spending, which made up about two-thirds, said Jamie Cox, managing partner at Virginia-based financial advisory firm Harris Financial Group. of US economic activity, as the data indicate.
In addition, companies showed increased confidence in return prospects by expanding inventory spending, according to the results.
Furthermore, the data revealed that the economic expansion was supported by contributions from state and local government spending, with an emphasis on infrastructure expenditures.
Describing the situation, Mark Zandi, chief economist at Moody’s Analytics, commented: “Strong growth and low inflation – a very good thing.”
President Joe Biden acknowledged the positive economic news, highlighting its importance as “good news for American families and American workers.”
GDP data, a key measure of a country’s economic well-being, is consistent with a series of positive signs. Just this week, the Dow Jones Industrial Average achieved a historic close above 38,000, and the S&P 500 hit a new record. Both indices saw gradual gains in early trading on Thursday, in response to the positive effects of GDP data.
Understanding consumer confidence, inflation, and Fed decisions
The jobs report released earlier this month reflects strong hiring in December, beating expectations. Despite strong economic indicators, consumer surveys initially showed frustration, which contradicted the data. However, a recent University of Michigan poll revealed a significant 13% increase in confidence for January, the highest level since July 2021.
Lydia Boussour of consulting firm EY described the unexpectedly positive economic performance as “the recession that wasn’t.” Despite this, he points to the possibility of a 35% recession, anticipating an economic slowdown and acknowledging that inflation will remain above the Federal Reserve’s target rate, albeit lower than its peak of 9% last year.
The Fed forecasts its stance on inflation later this year through interest rate cuts, but the timing remains uncertain. Such cuts could lower borrowing costs, which could stimulate economic activity through increased household spending and business investment.
However, the Fed faces the risk of inflation rebounding if interest rates are cut too quickly, as rising consumer demand could accelerate price increases.
Boussour explained that the unexpectedly strong growth announced on Thursday may allow the Federal Reserve to postpone interest rate cuts, as the economy shows resilience despite downward pressure from the central bank. “The recent series of positive economic surprises means that the Fed will not be in a rush to cut interest rates,” she stated, expecting the first cut to take place in May.