Lending Association

Unexpected resilience: Strong US economic growth and stable inflation defy 2023 predictions

A year ago, expectations for the performance of the US economy in 2023 were uniformly negative: a slowdown or recession, a surge in jobless numbers, weak earnings, and worse were predicted.

Twelve months on, who would have thought the economy would end with a wet sail behind it?

The US economy ended 2023 growing strongly, with inflation easing and the job market remaining solid despite a year of continuing layoffs, especially in the tech and media sectors.

US gross domestic product (GDP) increased at a faster-than-expected 3.3% annual rate in the December quarter, down from the 4.9% rate in the preceding three months but capping a year of stellar economic growth that very few forecasters had predicted.

This reading, the first of three estimates of US GDP for the December quarter and 2023, was far above market forecasts, which were grouped around 2.0% to 2.3%.

Over 2023, real GDP rose 2.5% compared to the 1.9% rise in 2022. GDP was 3.1% higher in the December quarter than the same quarter of 2022.

The figures do show that the Fed’s higher rates campaign took a small bite from growth, but the toll was less severe than initially forecast as a tight labor market continues to support consumer spending.

The strong growth news will not lead to any change in the Fed’s stance at its first meeting of 2024 this week. The central bank’s key rate will remain on hold at 5.25% to 5.50%.

This week’s economic news, from the Fed’s post-meeting statement to Chair Jerome Powell’s press conference and the first jobs report of 2024, should help set the narrative straight on what the Fed is likely to do in the northern spring.

Forecasts are for a slowing in January jobs data (the initial jobless claims last week edged up to 183,300 from 180,600 the week before) to around 170,000 new jobs, compared to the surprise 216,000 for December.

Moody’s economists pointed out that “Behind the U.S. economy’s impressive performance is consumer spending, adding 1.9 percentage points to growth, nearly as much as the prior quarter.”

“With inflation moderating, real after-inflation incomes, and thus consumers’ purchasing power, are improving. Still-substantial excess savings built up during the pandemic by middle- and especially high-income households also continue to support spending.

‘Near-record stock prices and housing values and still-low and stable debt service burdens are also helping,” Moody’s explained (That’s the so-called wealth effect).

A year ago, the big tip was for a hard landing, a jump in jobless numbers, and sluggish growth as mainstream economists and policymakers believed a period of below-trend growth would be needed to see inflation fall.

The consumer price index in December was 3.4%, more than half the 8.3% rate at the end of 2022 and the 9.1% peak in June of the same year. The US jobless rate was 3.7% in January, up slightly from 3.5% in December 2022.