WASHINGTON – The U.S. economy grew at a robust 3.2% annual pace from October through December, propelled by healthy consumer spending, the Commerce Department reported Wednesday in a slight downgrade from its initial estimate.
The expansion in the nation's gross domestic product — the economy's total output of goods and services — slipped from a red-hot 4.9% from July through September. The fourth-quarter GDP numbers were revised down from the 3.3% pace Commerce initially reported last month. U.S. growth has now topped 2% for six straight quarters, defying fears that high interest rates would tip the world's largest economy into a recession.
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Far from stumbling, the economy grew 2.5% for all of 2023, topping the 1.9% growth in 2022.
Consumer spending, which accounts for about 70% of U.S. economic activity, grew at a 3% annual pace from October through December. Spending by state and local governments rose at a 5.4% annual rate from October through December, fastest pace since 2019. Growing exports also contributed to fourth-quarter growth.
Wednesday’s report also showed inflation pressures continuing to ease. The Federal Reserve’s favored measure of prices — the personal consumption expenditures price index — rose at a 1.8% annual rate in the fourth quarter, down from 2.6% in the third. Stripping out volatile food and energy prices, so-called core inflation was up 2.1%, accelerating slightly from a 2% increase in the third quarter.
The United States is expected to keep churning out growth in 2024. The International Monetary Fund expects the American economy to expand 2.1% this year — more than twice its forecasts for growth in the major advanced economies Japan, Germany, the United Kingdom, France and Italy.
Voters are weighing the economy's health in advance of November's presidential election. Many Americans are exasperated with high prices and blame President Joe Biden. Although inflation has eased and hourly wage hikes have beaten price increases over the past year, consumer prices are still 17% higher than they were three years ago.
In response to resurgent inflation, the Fed raised its benchmark interest rate 11 times between March 2022 and July 2023, taking it to the highest level in more than two decades. Higher borrowing costs have reined in the inflationary surge. Last month, consumer prices were up just 3.1% from January 2023, down from a peak of 9.1% in June 2022 and coming closer to the Fed's 2% target.
To the surprise of the Fed and most economists, the progress against inflation has so far been accomplished without causing much economic pain. The unemployment has come in below 4% for 24 straight months, longest such streak since the booming 1960s. And employers have been adding a healthy average of 244,000 jobs a month over the past year, including more than 300,000 in both December and January.
American households are largely in good financial shape, allowing consumers to spend. And businesses have improved productivity by using automation and finding ways to make employees work more efficiently.
The combination of easing inflation and sturdy hiring and GDP growth has raised hopes the Fed can pull off a rare "soft landing'' — vanquishing inflation without causing a recession.
"We think growth will slow but will remain positive over coming quarters,'' said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. But the economy is likely to get a lift, she said, from Fed rate cuts later this year. The central bank has signaled that it expects to cut its benchmark rate three times in 2024.
Wednesday’s report was the second of three Commerce Department estimates of fourth-quarter GDP growth. The final revision comes out March 28.