GDP in fourth-quarter raised to 3.4% due to stronger consumer spending

United States

The numbers: The final reading of U.S. growth in the 2023 fourth quarter was raised a few notches to a 3.4% annual pace, reflecting strong consumer spending and a surprisingly resilient economy.

Previously the government said gross domestic product had expanded at a 3.2% rate in the final three months of last year. The figure is adjusted for inflation.

The growth rate of the economy is forecast to taper to a still-healthy 2% in the soon-ending first quarter.

GDP is the official scorecard of the economy. The economy’s top sustainable speed in the long run is generally seen at around 1.8%.

Key details: Consumer spending, the main engine of the economy, was revised up to to show a 3.3% increase in the fourth quarter instead of 3%.

Consumer spending accounts for about 70% of the U.S. economy.

Government spending was a bit higher than previously reported.

Overall business investment, the second largest peg of the economy, was also somewhat stronger.

Adjusted pretax corporate profits surged in the fourth quarter at an annual 4.1% rate, indicating that businesses are in very good shape.

Inflation using the personal-consumption expenditure, or PCE, price index rose at a mild 1.8% annual rate in the fourth quarter, unchanged from the prior estimate.

The more closely followed core rate was lowered a tick to a 2.0% annual rate — matching the Fed’s 2% inflation goal.

The central bank aims to get the rate of inflation down to 2% for the full year, but it’s wafted higher in the first few months of 2024.

One measure economists follow closely is the average growth rate of the U.S. economy when combing the spending side of the ledger (GDP) and the income side (gross domestic income.)

What that measure shows is the economy expanded at an even stronger 4.1% clip in the fourth quarter, up from 3.4% in the 2023 third quarter.

GDP is updated twice after its initial publication.

Big picture: The economy grew at a surprisingly fast pace in the second half of 2023 despite the highest interest rates in a few decades. Now growth is slowing a bit as higher rates start to bite and households draw down their savings.

Yet the economy could get a big recharge if the Federal Reserve cuts interest rates later this year as widely expected. The timing and size of rate cuts will depend on how fast inflation continues to slow toward the Fed’s 2% target.

Looking ahead: “The strong GDP number this morning — 3.4% vs 3.2% expected — is another reminder of how resilient this economy continues to be,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“With a resilient economy driven by a resilient consumer, it sets the table for another strong earnings season, which will kick off next month.”

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX were set to open higher in Thursday trading.