US Economy Did Better Than Expected in the Fourth Quarter, but Current GDP Estimates Crash
US Economy Did Better Than Expected in the Fourth Quarter, but Current GDP Estimates Crash

By Tom Ozimek

U.S. economic growth for the fourth quarter of 2023 has been revised upward, to 3.4 percent from 3.2 percent in the government’s third—and final—update of gross domestic product (GDP) figures, although real-time GDP estimates for the first quarter of 2024 have fallen sharply, undercutting hopes for an economic “soft landing.”

The economy expanded by 3.4 percent in the October–December period in 2023, up from the second estimate of 3.2 percent, according to a March 28 statement from the Bureau of Economic Analysis (BEA).

The third GDP estimate makes official that there have been six consecutive quarters of positive economic growth, prompting some analysts to suggest that the Federal Reserve may be “on track for a soft landing,” meaning that it will successfully cool the economy to bring down inflation without causing a recession.

However, various real-time GDP estimates for the first quarter of 2024 have declined significantly over the past month, suggesting that the strength of the fourth-quarter numbers is decidedly a rearview-mirror phenomenon and that the economy is headed for some choppy waters.

Crumbling GDP Estimates

Early estimates suggest that the U.S. economy is poised for a decent GDP reading in the first quarter of 2024, although there has been considerable softening in the estimates over the past month or so.

The Federal Reserve Bank of Atlanta’s GDPNow Model, for example, points to 2.1 percent growth during the January–March period, with the latest estimate current as of March 26. A month prior, on Feb. 26, that estimate was much higher at 3.2 percent.

A series of economic data releases, including lackluster manufacturing data at the beginning of March and a weaker than hoped for industrial production number on March 15, shaved a whopping 1.1 percentage points off the Atlanta Fed’s GDP estimate in just one month.

Also, the New York Fed Staff Nowcast now projects 1.9 percent GDP growth in the first quarter, down sharply from 2.8 percent a month prior, and the St. Louis Fed real GDP Nowcast currently expects 1.33 percent, down slightly from the 1.4 percent expected in the previous month.

Economists at The Conference Board recently abandoned their recession call, noting in a March 21 report that various business activity indicators, as well as labor market and consumer sentiment data, “have generally been moving in a favorable direction.”

“However, headwinds including rising consumer debt and elevated interest rates will weigh on economic growth,” The Conference Board wrote in the report. “While we no longer forecast a recession in 2024, we do expect consumer spending growth to cool and for overall GDP growth to slow to under 1 percent over the second quarter and third quarter 2024.”

The Conference Board’s leading economic index, a forward-looking gauge made up of 10 individual components including unemployment claims data and manufacturing new orders figures, rose in February for the first time in two years.

Despite February’s increase, the leading index still suggests some headwinds to economic growth, with the six- and 12-month growth rates for the index remaining negative.

“The Conference Board expects annualized U.S. GDP growth to slow over the second quarter to third-quarter 2024 period, as rising consumer debt and elevated interest rates weigh on consumer spending,” wrote Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board.

Inflation Outlook Improves

The government’s other gauge of economic activity, the gross domestic income measure, rose at 4.8 percent in the final quarter of 2023, the most in two years, according to data from the BEA.

Also, the personal consumption component in GDP was revised up to 3.3 percent from 3 percent, meaning that consumer spending was stronger than previously estimated and an improvement over the second quarter’s 3.1 percent increase.

Inflation figures that were released as part of the BEA’s economic growth data further bolstered the case that the economy remained relatively robust.

The headline Personal Consumption Expenditures (PCE) price index, a measure of inflation, remained unchanged from the prior estimate at 1.8 percent, but the core PCE measure, which excludes food and energy prices and is particularly closely watched by the Federal Reserve, was revised down by 0.1 percentage point, to 2 percent.

The Fed embarked on an aggressive interest rate-hiking cycle starting in March 2022 in a bid to quash soaring inflation, which hit a peak of 9 percent in June 2022. Although it has come down since then, inflation has plateaued in recent months at about 3.2 percent, significantly higher than the Fed’s target of 2 percent.

Speculation has been building that the Fed will cut interest rates at some point this year amid fears that higher-for-longer rate environment (currently within a range of 5.25 percent to 5.5 percent) could tip the economy into a recession.

The fourth-quarter 2023 GDP data suggest that the Fed has more scope to keep interest rates higher for longer to make sure inflation falls closer to target, although the softening in the first-quarter 2024 estimates challenges this view.

Federal Reserve Gov. Christopher Waller said on March 27 that the latest inflation figures (3.2 percent in February, up from 3.1 percent in January) were “disappointing,” and he insisted that the Fed is in no rush to cut.

“In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data,” Mr. Waller said in prepared remarks before the Economic Club of New York.

Elsewhere, consumer confidence improved slightly as concern about inflation eased.

The University of Michigan’s consumer confidence index rose to 79.4 in March from 76.9 in February.

“Critically, consumers exhibited confidence that inflation will continue to soften,” wrote Joanne Hsu, director of the university’s consumer confidence survey.

The one-year-ahead inflation expectations eased to 2.9 percent from 3 percent in the prior month, and the five-year-ahead inflation outlook inched down to 2.8 percent from 2.9 percent.

“Assessments and expectations of personal finances improved modestly from last month, as the perceived negative effects of high prices and expenses on living standards eased,” Ms. Hsu wrote.

The BEA data on economic growth also shows that, for all of 2023, the economy expanded by 2.5 percent, up from 1.9 percent in 2022.

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