WASHINGTON: The US economy likely grew at its slowest pace in 1-1/2 years in the fourth quarter as businesses throttled back on inventory investment and consumer spending cooled a bit, but the pace was probably enough to have kept a recession at bay in 2023.
The Commerce Department’s advance fourth-quarter gross domestic product report on Thursday, which is also expected to show inflation moderating last quarter, will reinforce expectations that the Federal Reserve will start cutting interest rates some time in the first half of this year.
“We are expecting growth to come in right in the sweet spot for the Fed,” said Scott Anderson, chief US economist at BMO Capital Markets in San Francisco.
“Slow enough to keep downward pressure on inflation, but solid enough to keep the economy growing in the first half of 2024.”
According to a Reuters survey of economists, GDP likely increased at a 2.0% annualized rate last quarter.
That would be the slowest since the second quarter of 2022 and follows a 4.9% pace of acceleration in the July-September quarter. Estimates ranged from a 0.8% rate to a 2.8% pace.
The economy would still be expanding at a pace above what Fed officials regard as the non-inflationary growth rate of around 1.8%.
Growth for the full year is expected to come in at about 2.5%, picking up from the 1.9% notched in 2022.
The economy has defied dire predictions of a downturn from economists and business executives since mid-2022, in part because of labor market resilience, marked by low layoffs and strong wage gains, which are underpinning consumer spending.
The Labor Department is expected to report on Thursday a moderate rise in initial claims for state unemployment benefits last week.
Increased government spending as well as near zero interest rates during the COVID-19 pandemic, which allowed some corporates and households to lock in low borrowing rates, have also helped stave off a recession.
Economists had largely based their gloomy forecasts on the rapid pace at which the Fed was raising rates to dampen demand.
Most have walked back their recession calls and now expect slow growth this year, before an acceleration in 2025 as the effects of anticipated rate cuts kick in.
“It’s not to say that the US economy could not go into recession,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
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“It’s just that we now believe that there is more likely than not a path to a ‘soft landing,’ where we don’t have consistent negative GDP prints.”
The US central bank is expected to keep its policy rate unchanged at the current 5.25%-5.50% range at its meeting next week.
With economic data, including December wage growth and retail sales surprising on the upside, financial markets have pushed the odds of a March rate cut to below 50%, but the probabilities rise for the May meeting.
Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.
Inventory accumulation is expected to have subtracted at least a full percentage point from GDP growth in the fourth quarter after adding 1.27 percentage points in the prior period.
JPMorgan estimates that inventory investment increased at a $14.7 billion rate last quarter, stepping down from the $77.8 billion pace in the third quarter.
Slow, but healthy spending
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, is expected to have slowed to around a still healthy 2.5% rate in the October-December quarter, from the July-September quarter’s 3.1% pace.
Spending has also been supported by households drawing on savings accumulated during the pandemic.
Low-income households, who have depleted their excess savings, have been relying on credit cards to fund purchases.
Amid rising anecdotal evidence of consumer distress because of higher borrowing costs, economists expect spending to slow down significantly and cause the economy to either stall or contract in the second quarter.
There will also be less money from the government going to households.
“That’s going to put a weight on consumption going forward,” said Dan North, senior economist at Allianz Trade North America.
“We’re looking very much at slow growth, our forecast is not for a recession.”
For the fourth quarter, a solid pace of government spending is expected, driven by state and local governments, where hiring has accounted for a chunk of recent payrolls gains.
Growth in residential investment likely slowed after ending nine straight quarters of declines as higher mortgage rates and tight supply weigh on home resales, reducing broker commissions.
Business spending on equipment is forecast rebounding after contracting in the third quarter.
Economists are split on whether trade remained neutral or contributed slightly to GDP growth. Inflation likely subsided further last quarter.
A measure of inflation in the economy is forecast increasing at about a 2.2% rate, slowing from the third quarter’s 2.9% pace.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy components is estimated to have risen at a 2.0% pace, matching the July-September quarter’s advance.
The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target.
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“We’re still in a disinflationary mode,” said Brian Bethune, an economics professor at Boston College.
“The only remaining problem in terms of inflation is shelter. There’s a significant structural deficiency of housing supply relative to demand, and there is only a limited amount the Fed can do about that.”
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