U.S. economy booms at a 3.3% pace in the fourth quarter

REAL ECONOMY BLOG | January 25, 2024

Authored by RSM US LLP

The U.S. economy expanded at a robust 3.1% pace from a year ago and closed the year with a booming 3.3% rate of expansion on the quarter, according to Commerce Department data released Thursday.

The strong gains were driven by household consumption, gross private investment and government spending aimed at boosting infrastructure and supply chain resilience.

But perhaps more important, the core personal consumption expenditures inflation metric on a quarter-over-quarter basis eased to 2%, which is in line with the Federal Reserve’s long-run inflation target.

While we anticipate a cooling in overall growth this year near the long-term trend of 1.8%, early signs point toward a soft landing of the economy and further disinflation that will allow the Federal Reserve to relax its restrictive policy rate by midyear. Such an easing should create the conditions for a sustained expansion over the next few years.

Our preferred alternative metrics all reflected enduring strength in the economy: Real final sales increased by 3.2%, gross domestic purchases rose by 2.8%, final sales to domestic purchasers were up by 2.7% and final sales to domestic private purchasers increased by 2.6%.

In our estimation, the U.S. economy is on a strong footing and the underlying rate of growth excluding inventory accumulation and trade is growing by just under 3%, which is well above the 1.8% long-run trend. We are quite comfortable with our first-quarter growth forecast of 2.2%.

Policy implications

The easing of the PCE inflation metric is aligned with other data in the economy that captures the broad disinflation coursing through the economy.

This data, along with the three-month and six-month annualized pace of inflation that will be published Friday inside the personal income and spending report, will add pressure on the Federal Reserve to further clarify the balance of risks to the economic outlook and lay the groundwork for rate cuts by midyear. We think such risks are no longer tilted toward a a higher policy rate but are seen in both directions.

We are comfortable with our forecast of a June rate cut and four 25 basis-point rate reductions for the year. Should the long-awaited rolling over of shelter and rents—which we can observe in real-time data—show up in the Consumer Price Index, we would not be surprised if the Fed moves to cut rates in May.

At this time, all things being equal, we do not see a rate cut taking place in March.

The composition of growth includes a number of factors:

• Infrastructure outlays: The strong expansion in outlays on structures is linked to the policy tailwind from infrastructure spending and the construction of manufacturing facilities.
• Government spending: These outlays are financing the increase in productivity-enhancing equipment that is boosting supply chain resilience.
• Consumer spending: The tight labor market and rising real incomes are helping to fuel the continuing economic expansion.

The data

Outlays on goods increased by 3.8%, spending on durables rose by 4.6%, non-durables were up by 3.4% and services rose by 2.4%. All of those categories underscored the 2.8% advance in personal consumption.

Gross private investment advanced by 2.1% with fixed business investment increasing by 1.7%. Outlays on structures—those new manufacturing centers—increased by a robust 3.2%, while spending on equipment jumped by 1% and intellectual property, which fuels productivity, rose by 2.1%. Spending on residential investment increased by 1.1%.

Exports advanced by 6.3% and imports by 1.9%. Government consumption increased by 3.3% with a 2.5% increase in federal spending, a 3.7% rise in state and local outlays, a 0.9% advance in national defense spending and a 4.6% increase in non-defense spending.

Inventories advanced by $82.7 billion, which added 0.7% to gross domestic product.

The takeaway

The U.S. economy last year expanded by a robust, above-trend pace of 3.1% and a fourth quarter pace on a seasonally adjusted rate of 3.3% of which 1.91% was driven by a resilient consumer.

One of our economic themes from last year was resilience not recession. This strength will spill over into this year and at this time we estimate that there is a 15% probability of a recession over the next 12 months.

The current expansion will endure as policymakers and investors prepare for rate cuts by the Federal Reserve that should start no later than midyear.