Thursday’s fourth quarter GDP reading came in higher than expected, with growth reaching 3.3% to close out the year. On Friday, the good news kept coming as the core Personal Consumption Expenditures index came in at 2.9% for December. Both readings, combined with the ongoing low unemployment rate, point to a booming US economy.
GDP Once Again Comes In Hot
Gross Domestic Product came in much higher than expected. Economists had predicted growth to be around 2%. This continues a pervasive trend in 2023 of the economy defying all expectations.
The American consumer has kept the economy humming despite inflation levels not seen since the 1980s. A combination of savings from pandemic-era programs and a strong job market has kept consumption high. While most pandemic stimulus has ended, the job market has remained strong.
What is perhaps most stunning is that the economy has remained hot despite a rapid increase in interest rates by the Federal Reserve that was meant to cool the economy to help bring down inflation. The Fed hoped to cool things off enough to lower inflation without causing too much harm to the economy, something they call a “soft landing”.
Somehow, it appears the Fed has helped lower inflation without harming the economy at all. Now, the Fed is set to begin lowering interest rates later this year. 2024 could be another big year for GDP.
Core PCE Dropping
Core PCE is a reading on inflation that ignores volatile elements in the index such as fuel and housing costs. It is the Federal Reserve’s preferred measure of inflation, and the fact that it continues to drop is a great sign for the economy.
While the Fed deserves some credit for the falling inflation, we have to remember that this bout of rising prices was caused by a particular problem: COVID-19. The pandemic caused supply chain issues. This slowdown in goods was matched with stimulus from governments across the world. We had too many dollars chasing too few goods.
Inflation was bound to come down sooner or later as the supply chain issues sorted themselves out. The resilience of the American consumer, unfortunately, dragged the inflation bout out, as they had surprising tolerance to the high prices.
Remember, a business will charge whatever price a customer is willing to pay. If consumers show a tolerance to high prices, businesses have no incentive to lower them. They are in business to make a profit after all.
Roaring 20s?
The stage appears to be set for a repeat of the roaring 20s. The last decade was a great one for the US economy. While the recovery from the 2008 financial crisis was slow at first, it ended up being long and consistent. The pandemic appears to have been a bump in the road, and economic expansion is now back on the menu.
The economic picture looks rosy, but there are still potential problems that could trip things up. The battle against inflation is not yet completely won, as the Federal Reserve wants inflation down to 2%. Turmoil in the Middle East and Europe could cause further disruptions and cause inflation to flair up again.
Partisan bickering in Congress could cause government shutdowns or even a default if Congress fails to get the nation’s business done. On top of yearly issues with the budget, the US faces a major debt problem in the coming years that could also threaten the economy.
Thus far, the US economy has navigated these pitfalls and continues to hum along.
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