In the fourth quarter, US economic growth experienced a slight deceleration. However, the GDP composition revealed a more resilient outlook than previously anticipated, suggesting promising prospects for the near future, despite a sluggish start attributed to cold temperatures.
The Commerce Department's adjustment to its GDP growth forecast on Wednesday primarily stemmed from reduced investment in inventories. In the meantime, there was notable upticks in consumer spending, state and local government investments, and both housing and business expenditures.
Despite concerns over a potential recession following the Federal Reserve's interest rate hikes to manage inflation, the economy remained resilient. This resilience can be attributed to a robust labor market, which has sustained elevated wages and bolstered consumer spending, dispelling pessimistic forecasts.
In the latest update from the U.S. Bureau of Economic Analysis, GDP expanded at an annual rate of 3.2% in the previous quarter, slightly below the anticipated 3.3%. According to economists surveyed by Reuters, forecasts remained unchanged, with inventory investment rising by $66.3 billion, falling short of the expected $82.7 billion increase.
The revised estimate revealed that inventories subtracted 0.3 percentage points from GDP growth, in contrast to the initially projected addition of 0.1 percentage points. Notably, the economy surged by 4.9% in the third quarter and achieved a 2.5% growth rate in 2023, surpassing the 1.9% recorded in 2022.
Consumer spending, which constitutes over two-thirds of U.S. economic activity, rose by 3.0%, contributing two percentage points to GDP growth instead of the anticipated 2.8%.
The uptick in consumer spending, alongside increased residential and non-residential business investments, suggests stronger domestic demand than initially envisioned. Final sales to domestic buyers, a key indicator of domestic demand, climbed to 2.9% from the previous 2.6%.
As demand surged, inflation saw an upward adjustment, though growth rates remained moderate compared to earlier in the year. The Personal Consumption Price Index (PCE), excluding volatile food and energy components, experienced a 2.1% rise, while the core PCE index grew by 2.0%.
Last quarter, core inflation slightly surpassed the Federal Reserve's 2% target and continues to be propelled by escalating home prices. Forecasts anticipate an inflationary uptick following stronger-than-expected price hikes in consumer, industrial, and imported goods observed in January.
The escalation in inflation prompted financial markets to revise expectations for a potential interest rate cut, shifting the anticipated timeframe from May to June. This rise in inflation was primarily attributed to the early-year price surges.
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