The economy grew 2.5% in 2023, defying fears of a recession and outperforming expectations despite a historic campaign by the Federal Reserve to limit the inflation that wracked the country.
The new data, adjusted for inflation, were published Thursday by the Bureau of Economic Analysis in its report for gross domestic product for the fourth quarter. The report showed GDP growing at a 3.3% annual rate to end the year, more than the 2% level that economists had expected. That number is a preliminary estimate and will be revised in the coming months.
Notably, just last March, Fed officials were projecting that GDP growth would only grow by 0.5% this year — showing just how much the economy outperformed expectations. At 2.5%, pandemic period aside, GDP growth was the strongest since 2018.
Taken as a whole, the latest report shows that the economy was able to side-step a recession that many economists had predicted would hit sometime last year. The numbers indicate that the economy, and in particular household consumption, hummed right along despite the pressures of inflation and high-interest rates.
“Net, net, it is positively shocking just how strong the US economy is right now with another blow out quarter for growth recorded at the end of last year and we simply cannot keep getting numbers like this and pretend the economy is on the verge of collapse,” said Chris Rupkey, chief economist at FWDBONDS.
President Joe Biden will undoubtedly tout the annual GDP growth as proof that his “Bidenomics” agenda is working — despite his economic approval rating being in the dumps and voters consistently expressing concerns for the state of the economy.
The strong growth in output for the year reflected robust consumer spending, as well as business investment, both of which weathered the ravages of inflation and the run-up in interest rates. One of the few weaker areas was the housing market, which was hurt by soaring mortgage rates.
More people have shied away from selling their homes or looking for a new home amid the higher rate environment and are biding their time until rates come down.
The Fed began hiking its target interest rate in March 2022 in response to inflation, which began rising in the middle of 2021 and soon grew into a tsunami that hadn’t been seen in generations. At its peak, price growth crested at about a 9% annual pace.
Since its peak, inflation has fallen to a 3.4% rate, according to the latest consumer price index numbers. That is still above the Fed’s preferred 2% level, although shows that the central bank’s nearly two-year quest to tamp down inflation has borne results.
Higher interest rates are intended to dampen demand and thus slow price growth, but if demand is hit too hard, it can cause an economic downturn or recession. Yet Thursday’s numbers show that 2023 saw continued expansion rather than contraction.
While the Fed hasn’t ruled out another rate hike should inflation start moving upward again, the general consensus among economists and Fed watchers is that the central bank will soon begin a pivot to cutting interest rates, something that investors think might start as soon as March.
If upcoming inflation numbers remain stubborn, instead of hiking again, the Fed might opt instead to just keep holding the federal funds rate at 5.25% to 5.50%, the level it has been at since July of last year.
But keeping rates higher for longer raises the odds of a recession this year, something that would spell major trouble for Biden as he fights for reelection and would provide much fodder for attacks from Republicans leading up to November.
Several forecasters are predicting a mild recession this year, and there is near unanimity among economists that the economy will slow in the coming months. The Fed itself predicts that GDP will only grow at 1.4% this year.
Not only has GDP overperformed the past year, but the labor market has also surpassed expectations in defiance of the higher interest rate environment.
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The economy added another 216,000 jobs in December, and the unemployment rate was at 3.7%, a low level, historically speaking. The last month of negative job growth was in December 2020, amid the chaos of the pandemic.
Along with the Fed expecting GDP growth to fall this year, it also expects unemployment to rise. The central bank is projecting that the unemployment rate will be at 4.1% as 2024 comes to a close.
