US economy continues to shine with help from consumers, labor market

WASHINGTON: The US economy grew faster than previously estimated in the fourth quarter, boosted by strong consumer spending and business investment in non-residential structures like factories and healthcare facilities.

The report from the Commerce Department on Thursday also showed profits rising at a solid clip last quarter, driven by non-financial corporations. Increasing profits, together with rising worker productivity, could encourage companies to retain their employees, and extend the economic expansion.

The economy has shrugged off fear-mongering about a recession following 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022 to quell inflation. Though momentum has slowed, it continues to outpace its global peers.

The report, which also showed underlying inflation pressures easing last quarter, did not change expectations that the US central bank will start cutting rates by June.

“The economy is in good shape,” said Bill Adams, chief economist at Comerica Bank in Dallas. “It is operating on a more even keel than during the pandemic and its immediate aftermath.” Gross domestic product increased at a 3.4% annualized rate last quarter, revised up from the previously reported 3.2% pace, the Commerce Department’s Bureau of Economic Analysis said in its third estimate of fourth-quarter GDP.

The revision reflected upgrades in consumer spending, business investment as well as state and local government spending, which offset downgrades to inventory accumulation and exports. Economists polled by Reuters had expected GDP growth would be unrevised.

The economy is growing faster than the 1.8% pace Fed officials regard as the non-inflationary rate of growth. It grew at a 4.9% pace in the July-September quarter, and expanded 2.5% in 2023, an acceleration from 1.9% in 2022.

Growth estimates for the first quarter are around a 2.0% pace. The increase in core inflation last quarter was trimmed to a 2.0% rate from a 2.1% pace.

Stocks on Wall Street were little changed ahead of the Good Friday holiday. The dollar rose against a basket of currencies. US Treasury prices were mixed.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.3% rate, adding 2.20 percentage points to GDP growth. It was previously estimated to have grown at a 3.0% pace. The upward revision was in services.

The upgrade to business spending reflected higher outlays on manufacturing as well as commercial and healthcare structures than previously estimated. Spending on intellectual property products was also revised up, while the decline in outlays on equipment was not as steep as previously estimated.

Inventory investment was lowered to a $54.9 billion rate from the previously estimated $66.3 billion pace. While that subtracted 0.47 percentage point from GDP growth, the outlook for this year is encouraging. Stronger consumer spending last year and expectations for a moderation this year likely resulted in the slower pace of inventory accumulation.

“We anticipate that inventory accumulation will stabilize, then begin to pick up again over the next few years,” said Michael Pearce, deputy chief US economist at Oxford Economics in New York. “That turn in the inventory cycle will help support GDP growth this year and make the slowdown gradual.”