Improving indicators raise expectations for economic outlook

Once again, the economy has outfoxed economists, producing better than expected positive results and maybe, just maybe, extinguishing the notion of an impending recession and meeting the Federal Reserve’s goal of inflation settling at 2%.

The Commerce Department said Thursday that gross domestic product, a measurement of the value of all goods and services, grew at a solid 3.3% annual rate in the fourth quarter of 2023, down from 4.9% in the third quarter but easily above expectations.

“Economists keep singing the blues, but the economy is playing rock and roll,” said Dan North, senior economist with Allianz Trade Americas, a trade credit insurance company in Maryland.

In a continuing story, consumer spending, corporate hiring, wage increases, and softening inflation again roiled expert predictions that the Fed’s successive interest-rate hikes would slow the economy. Instead, the opposite happened. The Commerce Department said that for the full year 2023, G.D.P. grew 3.1%, up from less than 1% the year before and at a faster pace than the average for the five years before the pandemic.

The numbers were greeted happily by analysts, some of whom raised their expectations for the coming year.

Fed 'confident' in inflation drop

“Despite strong economic growth, the goal of combatting runaway inflation is on its way to being accomplished from the Fed’s perspective,” said Steve Rick, Chief Economist at TruStage (Formerly CUNA Mutual Group), a financial services company in Madison, Wisconsin. “Moving forward, the Fed is confident that inflation will fall to the 2% target level, giving consumers greater purchasing power and the ability to replenish savings balances. I am cautiously optimistic that this year both economic growth will remain positive and inflation will ease.”

Consumer spending grew at 2.8%, Thursday’s report said, a bit slower than the previous quarter. Housing showed some positive growth for the second quarter in a row despite high interest rates,  New orders for durable goods were steady in December with an increase of 5.5%, versus an expected gain of 1.5%. Business investment and personal income both showed positive gains as inflation continued to fall.

“One of the most important things I saw was a continuous drop in the inflation numbers,” said North. “The core [Personal Consumption Expenditures] went from 3.8 year over year, down to 3.2. The target is 2 and we're still a ways from that but we’re moving pretty quickly.”

Slow, steady growth predicted

North and others are predicting slow and steady growth in the economy for 2024.

The equity markets responded favorably to the news with all indices – S&P, Dow, and NASDAQ – all up an average of nearly 1%, with the Dow reaching a new record closing at 38,049, up 243.

“We've had this big rally and I think it's all on the anticipation that interest rates are going to go down,” North said. So, stock prices go up. The other part of the stock market is, you can never tell, month to month or, week to week, what it’s going to do.

North pointed to a recent study that showed the S&P 500 registered its biggest gains in just 10 days over the last 20 years.

“If you missed those 10 days, your return gets cut in half,” he said. “So, if you can figure out which 10 days to be in or out, you’ll do well.”

Despite the good economic news, North and others said there are some headwinds to be watched in the year ahead. In particular, they point out that credit card and consumer debt is rapidly rising, which could lead to significant defaults.

“If you go back to the beginning of 2021, wage earners are still underwater, and that's why things, for the most part, still feel expensive,” he said. “It's because of the cumulative nature of price increases. So, while earners have gone up 14% in that time period, food is up 20%, housing 30%, and gasoline broadly is up 37%. So, you know, the wage earners have made some recent gains, but they’re still underwater.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].