U.S. Economy Grew 3.1% Over the Last Year

The U.S. economy grew 3.1% over the last year as strong consumer spending and hiring upended recession fears.

Economists surveyed by The Wall Street Journal had estimated that gross domestic product grew at an annual rate of 2% in the fourth quarter from the third. Consumer spending, which accounts for about two-thirds of economic output, is seen as the driver of continued growth. Moderating inflation and a still-tight labor market have boosted consumer confidence levels, according to some surveys.

The 2023 figures stand in contrast to what economists expected a year ago, when they saw a recession as very likely and expected anemic 0.2% growth during the year.

“It’s been a really strong year for economic growth,” said James Knightley, chief international economist at ING. “The consumer was meant to roll over—and they didn’t.”

Americans still spending

Consumers’ willingness to spend was on display in the holiday-season retail performance. Retail sales jumped in December and far outpaced inflation.

Americans’ confidence in the economy rose as wage growth exceeded price increases: Consumer sentiment surged 29% from November into January, the biggest two-month increase since 1991, the University of Michigan said. Consumers expect inflation to be much tamer than they thought only a few months ago.

Still, there are signs that spending—and the whole economy—won’t be able to continue at such a rapid clip. Economists, expecting consumer outlays to cool, forecast growth to ease to 1% this year.

The four biggest U.S. banks reported higher credit-card spending in 2023 compared with the previous year and said that customers are taking longer to pay off balances. Delinquency rates are rising. The personal saving rate is well below the prepandemic level.

“Consumers have used run-ups in debt and failing to save and invest in the future” to prop up their spending, said Amy Crews-Cutts, chief economist at AC Cutts & Associates. “It’s going to take them a while to dig out.”

Signs of stress

Other signs of a slowing, though not crashing, economy have emerged. Manufacturing firms reported a modest drop in production in recent months and some large firms have announced layoffs.

Unemployment overall has barely budged, but laid-off workers are taking longer to find new jobs. The picture is more mixed at the local level: In December, 18 states had higher unemployment rates than they did a year earlier, while 15 states saw declines.

Businesses are uncertain of how much pricing power they retain after years of steady hikes that have been absorbed by customers. For some food and snack companies, including Conagra, the volume of purchases has slowed, and they are starting to cut prices on some items. Procter & Gamble, however, reported strong earnings on Tuesday that reflected growth from both price increases and higher sales volumes.

Help on the way?

The prospect that the Federal Reserve could lower interest rates in the not-too-distant future fueled a stock market rally in recent months, and cheaper financing costs could reinvigorate household and business investment later this year. The gradual cooling of the labor market combined with progress on taming inflation has investors watching for when the Fed might begin to cut its benchmark interest rate.

Fed officials are on track to hold rates steady at a 23-year high at a meeting next week, but penciled in three rate cuts for 2024. Most investors expect the Fed to begin lowering rates starting at its May meeting, according to CME Group data.

Falling mortgage rates are leading to increases in housing activity following the worst year for home sales in decades. Mortgage purchase applications rose in the week ended Jan. 12 to the highest seasonally adjusted level since July, according to the Mortgage Bankers Association.

Though Fed officials have said they don’t want to cut rates until they are convinced that price pressures have been durably suppressed, markets have already turned their attention to the possible growth that might follow.

“The Fed is going to hit its target, and investors know that that means rate cuts,” said Joe Brusuelas, chief economist at RSM US. “We’ll soon not be talking about a soft landing—we’ll be talking about a reacceleration.”

Write to Gabriel T. Rubin at [email protected]