Economic Growth Slows in Fourth Quarter of 2023, Driven by Decelerating Inventory Investment and Consumer Spending

The United States economy experienced a moderate expansion in the fourth quarter of 2023, marking a deceleration from the robust growth witnessed in the previous quarter. According to the Bureau of Economic Analysis (BEA), real gross domestic product (GDP)—a measure of the total value of goods and services produced domestically—increased at an annual rate of 3.3%, down from 4.9% in the third quarter.

Key Economic Indicators:

– Real GDP rose by 3.3% in Q4 2023, a slowdown from 4.9% growth in Q3.
– Consumer spending, exports, and government investments contributed to growth.
– Imports increased, while inventory accumulation decelerated.
– Prices moderated, with the PCE price index rising at a slower pace.
– Annual GDP growth in 2023 reached 2.5%, driven by consumer spending, non-residential investments, and government outlays.

Growth Drivers and Challenges:

The moderation in economic growth during the fourth quarter can be attributed to several factors. Private inventory investment, which had been a significant contributor to growth in previous quarters, decelerated notably. Federal government spending also slowed, partly offsetting gains in state and local government investments. Residential fixed investment, primarily new residential construction, experienced a decline. Additionally, consumer spending, a key driver of economic activity, grew at a slower pace compared to the third quarter.

Sectoral Contributions to Growth:

Consumer spending, the largest component of GDP, continued to drive growth in the fourth quarter. Both services and goods purchases contributed to the increase. Within services, food services and accommodations, as well as healthcare, were the leading contributors. For goods, pharmaceutical products and recreational goods, including computer software, were key drivers of growth.

Exports, which represent goods and services sold abroad, also increased in the fourth quarter. Both goods, led by petroleum, and services, particularly financial services, saw gains. State and local government spending rose, primarily due to higher compensation for employees and investments in infrastructure. Nonresidential fixed investment, which includes spending on intellectual property, structures, and equipment, also increased.

Inflation and Price Developments:

The price index for gross domestic purchases, a measure of inflation, increased by 1.9% in the fourth quarter, a deceleration from the 2.9% rise in the third quarter. The personal consumption expenditures (PCE) price index, a closely watched inflation gauge, rose by 1.7%, compared to 2.6% in the previous quarter. Excluding volatile food and energy prices, the core PCE price index held steady at 2.0%, indicating stable underlying inflation.

Personal Income, Saving, and Disposable Income:

Current-dollar personal income, which includes wages, salaries, and other forms of income, increased by $224.8 billion in the fourth quarter, following a $196.2 billion rise in the third quarter. Disposable personal income, which represents income after taxes and other deductions, grew by a solid 4.2% or $211.7 billion. Real disposable personal income, adjusted for inflation, increased by 2.5%, reflecting a gain in purchasing power for households.

Annual Economic Performance in 2023:

For the full year of 2023, real GDP grew by 2.5%, a moderate expansion compared to the 1.9% growth in 2022. Consumer spending, nonresidential fixed investment, and government outlays were the primary drivers of growth. However, residential fixed investment and inventory accumulation declined, partially offsetting the gains. Imports decreased during the year.

Data Completeness and Revisions:

It is crucial to note that the GDP estimate for the fourth quarter is based on incomplete data and subject to further revision as more comprehensive information becomes available. The BEA will release a “second” estimate for the fourth quarter on February 28, 2024, which is expected to provide a more accurate picture of economic activity during the period.

Economic Outlook and Challenges Ahead:

The fourth-quarter slowdown in economic growth raises questions about the sustainability of the current expansion. While the labor market remains strong, with low unemployment and rising wages, concerns about inflation and the potential impact of monetary tightening by the Federal Reserve may weigh on economic sentiment and investment decisions. The upcoming release of the revised GDP estimate and other economic indicators will provide further insights into the health of the U.S. economy and its trajectory in the coming months.