The U.S. economy continued to grow at a healthy pace in late 2023, capping a year in which unemployment remained low, inflation subsided and the widely predicted recession never materialized.
Gross domestic product, adjusted for inflation, grew at an annual rate of 3.3% in the fourth quarter, the Commerce Department said Thursday. This figure is down from the third quarter’s rate of 4.9%, but nevertheless demonstrates the resilience of the recovery after the economic upheaval caused by the pandemic.
The latest reading is preliminary and may be reviewed in the coming months.
Forecasters entered 2023 expecting the Federal Reserve’s aggressive interest rate hike campaign to set the economy back. Instead, growth accelerated: for the year as a whole, measured from the end of 2022 to the end of 2023, GDP increased by 3.1 percent, compared to less than 1 percent the previous year and faster than in the five years before the pandemic. (A different measure, based on average production over the entire year, showed annual growth of 2.5% in 2023.)
There is also no indication that a recession is imminent this year. Early forecasts point to continued – albeit slower – growth in the first three months of 2024. Layoffs remain low and job growth has remained stable. The slowdown in inflation has caused wages to rise again faster than prices. And consumer confidence is finally showing signs of rebounding after years of sluggishness.
“It’s hard to imagine how things could improve after a soft landing,” said Brian Rose, senior economist at UBS. “Looking back at last year, the combination of growth and inflation that we experienced was not considered feasible by most people. Even the optimists were not optimistic about such strong growth, low unemployment and such rapid inflation.”
Risks remain. Consumers are increasingly financing their spending with credit cards and other forms of borrowing, such as “buy now, pay later” loans, which could prove unsustainable, especially if the job market weakens. weakens. High interest rates continue to impact the economy, and developments abroad – from conflict in the Middle East to economic weakness in China – could have domestic consequences.
Such threats do not appear to deter investors, who have pushed the stock market to record highs. And businesses also appear to be gaining confidence, stepping up their investments after a year spent preparing for a possible slowdown.
“I think the fears of a recession in the economy are now behind us and it appears that companies are planning for growth,” said Ben Herzon, economist at S&P Global Market Intelligence.
The surprising strength of the recovery in 2023 has led some economists to wonder why their forecasts were so wrong.
They may not have understood how the pandemic had rewritten the rules of the economy. The Fed has struggled in the past to bring down inflation without driving up unemployment. But this time around, the rapid rise in consumer prices was driven, at least in part, by the disruptions caused by the pandemic — and as those disruptions eased, so did inflation.
“This cycle is historically unique: We have never experienced a global pandemic before,” said Michael Gapen, chief U.S. economist at Bank of America. “Maybe the fault was relying too much on history and too much on models.”
