The US economy grew by 3.3% in the last quarter

The U.S. economy continued to grow at a healthy pace through the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized.

Gross domestic product, adjusted for inflation, grew by 3.3 percent year-on-year in the fourth quarter, the Commerce Department said Thursday. That was down from 4.9 percent in the third quarter, but easily exceeded forecasters' expectations and showed the resilience of the recovery from the economic turmoil of the pandemic.

The latest reading is preliminary and may be revised in the coming months.

Forecasters entered 2023 expecting the Federal Reserve's aggressive campaign of rate hikes to push the economy into a turnaround. Instead, growth accelerated: for the full year, measured from the end of 2022 to the end of 2023, GDP grew by 3.1 percent, up from less than 1 percent the year before and faster than in any of the five years leading up to the pandemic. (Another measure, based on full-year average production, showed annual growth of 2.5 percent in 2023.)

There are also few signs that a recession is imminent this year. Early forecasts point to continued – albeit slower – growth in the first three months of 2024. Layoffs remain low and job growth has been stable. Cooling inflation has led to wages rising faster than prices again. And consumer confidence is finally showing signs of recovery after years in the doldrums.

“It's hard to imagine how things could look better with a soft landing,” said Brian Rose, a senior economist at UBS. “Looking back at last year, the combination of growth and inflation that we had was not considered possible by most people. With such strong growth, low unemployment and inflation falling so quickly, even the optimists were not so optimistic.”

The fourth quarter data provided further evidence that the recovery remains on solid footing. Consumer spending, the foundation of the U.S. economy, grew at an annual rate of 2.8 percent, only modestly slower than the previous quarter. The residential construction sector, which was hit by high interest rates in 2022 and early 2023, grew modestly for the second quarter in a row. Companies have increased their investments in equipment. Personal income rose faster than prices as the strong labor market continued to benefit workers.

Perhaps most importantly, inflation continued to cool: Consumer prices rose 1.7 percent annually in the last three months of the year, below the Fed's long-term target of 2 percent. (Compared to a year earlier, prices had risen 2.7 percent.) That's not just good news for households hit by two years of rapidly rising prices; it also makes a recession less likely because it gives Fed policymakers more flexibility to cut rates to keep the recovery on track.

“Even if we see some signs of recession, the Fed could be able to respond quite quickly,” said Aichi Amemiya, senior economist at Nomura.

Risks remain. Consumers have increasingly financed their spending with credit cards and other forms of borrowing, such as buy now, pay later loans, which could prove unsustainable, especially if the labor market weakens. High interest rates continue to ripple through the economy, and developments abroad – from conflict in the Middle East to economic weakness in China – could have domestic consequences.

Such threats don't seem to bother investors, who have pushed the stock market to record highs. And companies also appear to be becoming more confident and increasing their investments after waiting a year for a possible recession.

“I think the fear that the economy could enter a recession is pretty much behind us, and it appears that companies are planning for growth,” said Ben Herzon, an economist at S&P Global Market Intelligence.

The surprising strength of the recovery in 2023 has led some economists to wonder how their predictions were so wrong.

One possibility is that they failed to recognize how the pandemic had rewritten the rules of the economy. The Fed has struggled in the past to reduce inflation without driving up unemployment. But this time, the rapid rise in consumer prices was at least partly driven by disruptions caused by the pandemic — and as those disruptions have subsided, so has inflation.

“This cycle is historically unique; we have never had a global pandemic before,” said Michael Gapen, chief U.S. economist at Bank of America. “Maybe the mistake was that we relied too much on history and too much on models.”