Volkswacht Bodensee - 'Resilient' US economy defies recession fears to cap solid year

The world's biggest economy expanded at an annual rate of 3.3 percent in the fourth quarter, fueled by a resilient jobs market and consumer spending, the Commerce Department said.

Full-year growth accelerated to 2.5 percent, above the 1.9-percent figure for 2022.

The performance will likely be welcome news for the Biden administration, which is pushing to convince voters that it has done a good job reining in costs while spurring investments to support the economy.

The latest data also strengthens optimism that the United States is achieving a "soft landing," where inflation comes down on the back of higher interest rates, without triggering a damaging recession.

The fourth quarter GDP jump "reflected increases in consumer spending, exports, state and local government spending" and other areas, said the Commerce Department.

At the start of 2023, analysts expected consumer spending to lose steam as households drew down on accumulated savings during the Covid-19 pandemic and as borrowing costs stayed high.

Some warned that the country could enter a recession, but growth has been supported by surprising strength in the labor market, with low unemployment even as hiring starts to cool.

- Slower growth -

"Economic growth has been more resilient than we anticipated going into 2023," Nationwide chief economist Kathy Bostjancic told AFP.

"The largest surprise was the ongoing strength in the labor market, which fueled robust job and wage gains," she added.

This in turn bolstered personal incomes that helped to support consumer spending.

But the economy is not out of the woods yet, given that employment growth in some sectors has weakened and interest rates remain at a 22-year high.

"We still expect the economy to grow in 2024, but at a slower pace," Bernard Yaros of Oxford Economics told AFP.

"As long as the labor market holds it together and unemployment drifts only gradually higher, the consumer will continue to power this expansion," he added.

- 'Clears the way' -

Residential investment is also likely to be a bigger factor behind growth, with the Federal Reserve expected to lower interest rates and homebuilders set to capitalize on lower mortgage rates and a frozen existing-home market, Yaros said.

The outlook for first quarter GDP now is "for a moderate slowing" from the fourth quarter, said Pantheon Macroeconomics chief economist Ian Shepherdson in a note.

"But we see few signs that the economy is about to roll over, and housing investment—the most interest-rate sensitive sector—is starting to recover," he added.

Although the Fed's longer-run GDP growth projection is 1.8 percent, the latest data may not stop policymakers from cutting rates as soon as in May or June.

"Inflation will be the key determinant of the timing and degree of Fed easing this year," Bostjancic said.

For now, the latest data points to "good growth with low inflation," said Robert Frick, corporate economist with the Navy Federal Credit Union.

"This clears the way for the Fed to deliver the three rate cuts projected for this year, at least," he added.

R.Flueckiger--VB