Personal Finance
US fourth quarter GDP beats expectations and recession odds
U.S. gross domestic product (GDP) in the fourth quarter of 2023 beat expectations and pushed expectations of an economic recession further into the distance, according to the Bureau of Economic Analysis (BEA).
Real GDP increased at an annual rate of 3.3% for the October-through-December period after rising 4.9% in the third quarter of 2023, according to the BEA’s advance estimate released Thursday. Real GDP for the year increased 2.5% compared with an increase of 1.9% in 2022. Economic forecasts had called for a deceleration of growth over the previous month with the expectation that the economy would expand by a 2% rate, according to a Reuters report.
The better than anticipated growth is down to solid consumer spending on both goods and services, the BEA said. At the same time, the personal consumption expenditures (PCE) price index increased by 1.7% in the fourth quarter, compared with an increase of 2.6% in the previous quarter. The PCE minus food and energy came in at an on-target of 2%, which means growth happened even as inflation moderated.
Fourth-quarter GDP growth is enough to push concerns of a recession further into the distance but at a pace that still supports the Federal Reserve to dial back interest rates this year.
“GDP has four cylinders, and the fourth quarter fired on them all,” Navy Federal Credit Union Corporate Economist Robert Frick said in a statement. “Once again, consumer spending made the biggest contribution, as more jobs, and wage growth above inflation, fueled spending power.
“Pundits are already saying this will be as good as it gets, but then again, most were predicting a recession last year that never came,” Frick continued. “In fact, the year saw solid overall growth at 2.5%. The other piece of good news is the PCE price index came in at an on-target 2%, which means we had good growth with low inflation. This clears the way for the Fed to deliver the three rate cuts projected for this year, at least.”
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Strong GDP keeps housing demand robust
A reversal in interest rates is crucial in igniting the mortgage market that has recently begun showing signs of thawing. With the promise that the Fed might deliver rate cuts faster than anticipated, Fannie Mae predicts that mortgage rates will drop below 6% by the end of 2024. Lower rates will likely increasingly entice homeowners, currently locked into sub-6 % mortgage rates, back into the housing market.
The solid economic growth will also help keep housing demand strong, according to the Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni.
“Stronger economic growth will benefit the housing market, keeping demand robust,” Fratantoni said in a statement. “For the broader economy, 2023 was a much better year than we had expected, even as the housing and mortgage markets were stuck in the doldrums. While we still anticipate that the economy will slow in 2024, this strong momentum in the fourth quarter makes a precipitous decline less likely. A path for lower rates should help housing markets.”
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Timeline on rate cuts still not defined
The Fed meets on January 30 and 31 to discuss interest rates. Most economists anticipate it will hold rates at their current level of 5.25% to 5.5%, according to a recent Finder.com survey of industry experts.
The majority (92%) of industry experts said the Fed would hold rates at its next meeting, while 8% expected the Fed would cut rates by 0.25%. However, most anticipate that rate cuts will come this year.
“The economy is still hot, and GDP is still going up fueled by consumer purchases,” Cynthia Wylie, a partner and co-founder of the Project Consultant, who also participated in the survey, said. “Inflation is cooling. The Fed has indicated a 75 basis point drop in 2024. I think that will start in March since the inflation rate increased slightly in December. Not sure of the exact timing, but I think they’ll stick with the 75 basis points throughout 2024.”
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