Economic Growth Slows, But Soft Landing Still Possible

The U.S. economy expanded at a 3.3% annual rate in the fourth quarter of 2023, decelerating from the 4.9% growth recorded in the third quarter, according to data released by the Bureau of Economic Analysis. While this slowdown was less severe than the 2% decline predicted by economists, it signals a moderation in economic activity amid the Federal Reserve’s efforts to curb inflation.

Key Takeaways

• GDP Growth: The economy grew at a 3.3% annual rate in Q4, surpassing the median forecast of 2% but falling short of the 4.9% growth in Q3.
• Soft Landing Prospects: The sustained economic growth indicates a potential “soft landing” scenario, where the economy cools down from its recent inflationary surge without plummeting into recession.
• Interest Rate Outlook: Markets anticipate that the Federal Reserve may soon pivot to cutting its benchmark interest rate to prevent an excessive slowdown.
• Consumer Resilience: Despite higher borrowing costs, consumer spending remained robust, growing at a 2.8% clip, highlighting the resilience of household finances.

Economic Momentum Persists Despite Rate Hikes

The GDP data reveals that while economic activity has decelerated in response to the Federal Reserve’s interest rate hikes, the economy continues to exhibit momentum. Since March 2022, the central bank has steadily raised its benchmark rate from near-zero to a 22-year high in July, leading to higher borrowing costs for mortgages, credit cards, and business loans. This deliberate tightening of monetary policy aims to cool down economic growth and tame the highest inflation in decades.

Inflation Cools, Recession Avoided (So Far)

Inflation has shown signs of cooling, dropping to a 3.4% annual rate as measured by the Consumer Price Index, from its recent peak of 9.1%. This moderation in price increases suggests that the Federal Reserve’s efforts are bearing fruit without triggering a recession or widespread job losses, as many had feared. The economy’s continued growth amidst elevated interest rates signals a potential “soft landing,” where the economy gradually transitions from its high-inflationary state without experiencing a sharp downturn.

Consumer Spending Remains Strong

Consumer spending, the primary driver of the U.S. economy, maintained its growth trajectory, albeit at a slightly slower pace. In the fourth quarter, consumer spending expanded at a 2.8% annual rate, down from the 3.1% growth in the third quarter. This resilience in consumer spending underscores the strength of household finances, despite the rising cost of borrowing.

Fed May Ease Up on Rate Hikes

The moderation in economic growth could prompt the Federal Reserve to reconsider its aggressive rate hike stance. Markets are pricing in a 44% probability that the Fed will initiate interest rate cuts at its meeting in March, according to CME Group’s FedWatch tool, which forecasts Fed rate movements based on fed funds futures trading data. A potential shift towards a more accommodative monetary policy aims to support economic activity and prevent an excessive slowdown.

Conclusion

The U.S. economy continues to grow, albeit at a slower pace, despite the Federal Reserve’s efforts to cool it down. This suggests that the economy is headed for a “soft landing” from its recent bout of high inflation, rather than a recession. The Fed may start cutting interest rates soon to support the economy.