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GDP Beats Expectations

GDP Beats Expectations

Jan. 25, 2024
But this may be as good as it gets for a while, says Oxford Economics.

The Commerce Department, on January 25, released fourth quarter GDP results, reporting that the figure grew 3.3% at an annualized rate. 

And for the full year, GDP grew 2.5%. 

Ryan Sweet, Chief U.S. economist at Oxford Economics provided the following analysis.

The economy faired noticeably better than expected in the final three months of last year, reinforcing our view that market expectations for the Federal Reserve to cut interest rates as early as March is premature. Though GDP is backward looking, the strength of real final sales to domestic purchasers, the engine of the economy, highlights the resiliency of the economy. 

Real GDP rose 3.3% at an annualized rate in the final three months of the year, stronger than our above consensus forecast for a 2.3% gain. Real consumer spending posted another solid gain and we expect it to hold up fairly well this year, supported by solid growth in real disposable income — the key driver for consumption. 

Inventories were surprisingly neutral for Q4 GDP following a sizable build in the prior three months. Net exports contributed positively to GDP growth but inventories and trade warrant close attention early this year because of the recent disruptions to supply chains. Government spending provided another boost to GDP but this won’t be duplicated this year as fiscal policy will be a slight drag on growth. 

GDP increased 2.5% in 2023, compared with the 1.9% gain in 2022. The jury is still out on how the economy fared because growth in gross domestic income has been much weaker and there is potential for large revisions when the Bureau of Economic Analysis releases its benchmark revisions later this year. 

There was also favorable news on the inflation front as the GDP deflator was up 1.5%, less than the consensus forecast for a 2.2% gain. The core PCE deflator was spot on the Fed’s 2% target. This leaves the door open for insurance rate cuts by the Fed, starting in May. The Fed has noted that they will cut before inflation returns to their 2% target. There are long and variable lags between changes in monetary policy and the economy, therefore if the Fed wants to pull off a soft landing, they will need to ease monetary policy this year. The orderly rebalancing of the labor market, disinflation in the pipeline and the moderation in nominal wage growth should provide the Fed cover to start easing in May. 

On an annual average basis, we look for real GDP to rise by 2.5% in 2023 and by 2% in 2024.  The consensus is a little less upbeat this year, with the Blue Chip consensus for a 1.6% gain in real GDP. Our forecast is now closer to the top end of the range of forecasts, with the average of the top 10 being 2.2% while the bottom 10 average 1%. This may appear a rosy forecast, but we estimate that the economy’s short-run potential growth rate to be a touch south of 2%. With no glaring fissures in the economy, the odds of a soft-landing have risen noticeably.

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