The world's biggest economy grew significantly faster than expected at the end of 2023, making a recession look increasingly unlikely.
ADVERTISEMENTThe US has seen a surprise boost for its economy with the news that the country's gross domestic product (GDP) grew at an annual pace of around 3.3% from October to December.
The figure, which looks at the output of goods and services in the US, was significantly higher than predictions of 2% although it is down from the 4.9% result recorded in July to September.
GDP for the full year came in at 2.5%, an increase on the 1.9% seen in 2022, the US Department of Commerce revealed.
Consumers are considered to be the key driver behind the strong growth report, with their spending rising at a 2.8% annual rate in the final quarter of 2023.
A soft landing?
A year ago, many analysts feared interest rate hikes would provoke a recession in the US by hampering borrowing and spending. However, this prediction now seems increasingly unlikely.
In response to inflation returning once again amid the easing of pandemic restrictions, the Federal Reserve (Fed) began to increase interest rates in March 2022.
Since then, rates have been raised 11 times, with the rate's upper limit now sitting at a more-than-20-year high of 5.5%.
However, instead of crippling the economy, high borrowing costs have slowed inflation without severely denting employment figures and growth, signalling that the Fed is set to achieve its "soft landing".
For the time being, the US inflation rate is still above the 2% target, but annual inflation has slowed from a peak of 9.1% in June 2022, to last month's rate of 3.4%.
This means that, while prices are still increasing, the rate of increase is slower.
Thursday's data also showed that the PCE index, a measure of inflation that looks at the cost of living for households, increased by 1.7% in the last quarter of 2023, down from 2.6% in the third quarter.
Turning to the labour market, layoffs have been fewer than expected and wage growth has been strong over the past year, which has helped to support consumer spending.
The unemployment rate has remained below 4% for 23 consecutive months, the longest sustained result since the 1960s, although new applications for US unemployment aid slightly increased last week.
For the job market to stay on its positive course, there is discussion as to when the Fed should start to take its foot off the inflation-fighting pedal.
"With the labour market demonstrating continued resiliency, the Fed might not be in any rush to initiate a rate cut," said JP Morgan in a statement at the start of January.
"But, there are signs the job market is cooling – the number of job openings fell in November to 8.79 million from 8.85 million in the prior month."
Added to this, there is also a concern that consumer spending could fall further as the year goes on, although it remained solid in the final months of 2023.
So far, consumer appetite has managed to weather the storm of high interest rates, thanks to the resilience of the job market, government stimulus packages, and pandemic savings, but these reserves are starting to dry up.
ADVERTISEMENTThis could provide an incentive for the Fed to cut rates, although officials are warning that the fight against high inflation is not over just yet.
