An individual carries procuring baggage at a shopping mall on the day after Christmas on Dec. 26, 2023 in Glendale, Calif. Strong client spending helped drive better-than-expected financial development within the last months of 2023.

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An individual carries procuring baggage at a shopping mall on the day after Christmas on Dec. 26, 2023 in Glendale, Calif. Strong client spending helped drive better-than-expected financial development within the last months of 2023.

Mario Tama/Getty Images

The U.S. economic system continues to defy expectations.

The nation’s gross home product — the broadest measure of financial exercise — grew at an annual tempo of three.3% in October, November, and December, in accordance with a report Thursday from the Commerce Department.

That was considerably quicker than forecasters had anticipated.

It was a becoming finish to a 12 months of sturdy financial development, defying projections that rising rates of interest would tip the economic system into recession.

Here are 5 issues to know concerning the economic system.

Consumers cleared the path

Consumer spending is the largest driver of the U.S. economic system, and Americans saved their foot on the gasoline — consuming out in eating places, shopping for sporting items, and paying for journey.

Personal spending grew at an annual tempo of 1.9% within the fourth quarter, solely a modest slowdown from the three months earlier than.

That was fueled by a better-than-expected labor market, with solid job growth and rising wages.

“Consumers are hanging tough,” stated Mark Zandi, chief economist of Moody’s Analytics. “They’re spending just enough to keep the economy moving forward but not so much that it would fan inflationary pressures.”

Firing on all cylinders

Other components of the economic system are additionally holding up nicely.

Government spending, enterprise funding and exports all rose within the fourth quarter. Even the housing sector, which has been battered by mortgage rates that neared 8% in October, was not the drag on the economic system that one would usually anticipate.

“Housing usually in a high-rate environment gets crushed,” Zandi stated. “It’s the thing that drives the economy into the ground. And that just didn’t happen this time around.”

Instead, new residence building helped make a small constructive contribution to GDP.

A head scratcher on rates of interest

All the constructive information was significantly placing given how a lot the Fed has raised rates of interest in an effort to curb inflation.

Economists feared that the central financial institution’s aggressive actions would set off an financial downturn, as has often been the case previously.

Instead, the economic system ended final 12 months 3.1% bigger than it was 12 months earlier, elevating hopes for a “soft landing,” during which inflation is tamed and not using a sharp soar in unemployment.

The unemployment fee has remained under 4% for practically two years, whereas wages are actually rising quicker than costs and the inventory market is hitting document highs.

“Not only was it not a bad year,” Zandi stated. “It was a really good year.”

People stroll previous a hiring signal for a restaurant in Washington, D.C. on Oct. 5, 2023. A stronger-than-expected labor market has helped enhance client spending.

Andrew Caballero-Reynolds/AFP by way of Getty Images

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People stroll previous a hiring signal for a restaurant in Washington, D.C. on Oct. 5, 2023. A stronger-than-expected labor market has helped enhance client spending.

Andrew Caballero-Reynolds/AFP by way of Getty Images

Inflation is easing

Even although the economic system is rising at a fast clip, it reveals no signal of overheating. Price indexes within the GDP report present inflation continued to ease, with core costs rising at an annual fee of simply 2% over the past six months.

That must be reassuring to the Fed, which is broadly anticipated to start reducing rates of interest later this 12 months.

“Despite the stronger-than-expected GDP growth rate in the fourth quarter, we view today’s data as ‘Fed friendly,'” stated chief economist Jay Bryson of Wells Fargo Economics.

Bryson expects the central financial institution to start decreasing charges in May, however provides that an earlier fee minimize in March just isn’t out of the query.

But there are potential setbacks

As encouraging because the GDP report is, there are at all times potential storm clouds on the horizon.

Zandi places geopolitical dangers on the high of that checklist, with the chance that Middle East tensions set off a spike in oil costs.

“That would be a mess,” Zandi stated. “Right now we’re paying close to $3 for a gallon of unleaded [gasoline] which is really good. But if we’re at $3.50 or $4, that undermines confidence. It undermines purchasing power.”

So far, forecasters have been pleasantly shocked that the economic system has prevented such pitfalls, and Zandi is optimistic that the encouraging developments will proceed.

“The risks are not just one-sized,” Zandi stated. “A year ago, it felt like they were all to the downside. Now you think there could be some upside as well, and you saw that in 2023.”