United States: Real GDP Closes Out 2023 with Solid Growth

Real GDP growth trounced expectations in the final quarter of 2023. Although the consensus forecast predicted a 2.0% gain, real GDP grew an annualized 3.3%. That's admittedly less than the 4.9% posted in Q2, but it's still a robust figure that once again exceeded the potential growth rate, which had been estimated at around 2%. Furthermore, this is a remarkable showing given the environment of high interest rates and relatively downbeat consumer sentiment (at least before the uptick in December).

The considerable growth seen in the fourth quarter was mostly fuelled by consumer spending, just as it was in the third. Consumption sped up an annualized 2.8%, barely slowing down from the 3.1% advance in the previous quarter. A strong labour market (494,000 net hires from October to December) and a rise in disposable personal income (+3.5% on an annualized basis in Q4 versus +0.3% in Q3) helped buoy consumer spending. Only time will tell if growth can continue at this pace in 2024.

Businesses also proved their resilience. Private non-residential investment climbed from 1.4% in the third quarter to 1.9% in the fourth, including a return to positive growth from investment in equipment. But the big surprise was private inventory investment. Even though many signs had suggested it would go down, it actually went up slightly. This modestly boosted real GDP growth, instead of dragging it down considerably as expected. Exports also beat expectations with a substantial 6.3% annualized gain, while imports ticked up a mere 1.9%. Consequently, net exports also contributed more (+0.43 percentage points) than expected. That said, since these upside surprises came from inventories and international trade, growth in domestic demand was slightly less impressive and, most of all, more in line with expectations. It went up an annualized 2.7% in the fourth quarter, compared to 3.5% in the previous quarter.

The key takeaway for the year as a whole is that high interest rates did little to blunt US growth. In fact, economic activity accelerated in the second half of the year (average real GDP growth of 4.1%) compared to the first half (average growth of 2.2%). This is surprising given all of the factors that should have held back growth. These include the March banking crisis, uncertainty due to the fight over the debt ceiling and federal spending, high inflation, strikes in both the auto and film and TV industries, the resumption of certain student loan repayments, and gloomy sentiment for most of the year. Under these circumstances, when the risk of recession seemed high, an annual gain of 2.5% is remarkable. Will growth remain resilient in 2024 and, if so, can inflation keep falling?

The US economy remains surprisingly strong in a high-interest rate environment. We wonder whether this resilience will make some Fed officials nervous. Luckily, the economy's robust performance hasn't driven inflation back up. The Personal Consumption Expenditures deflator is still moving back toward the central bank's target, leading us to expect the Fed to stand pat on rates.