Free spending at end of 2023 boosts U.S. economy

WASHINGTON — The nation’s economy grew at an unexpectedly brisk 3.3% annual pace from October through December as Americans showed a continued willingness to spend freely despite high interest rates and price levels that have frustrated many households.

Thursday’s report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — decelerated from its sizzling 4.9% growth rate the previous quarter. But the latest figures still reflected the surprising durability of the world’s largest economy, marking the sixth straight quarter in which GDP has grown at an annual pace of 2% or more.

Consumers, who account for about 70% of the total economy, drove the fourth-quarter growth. Their spending expanded at a 2.8% annual rate, for items ranging from clothing, furniture, recreational vehicles and other goods to services like hotels and restaurant meals.

The GDP report also showed that despite the robust pace of growth in the October-December quarter, inflationary measures continued to ease. Consumer prices rose at a 1.7% annual rate, down from 2.6% in the third quarter. And excluding volatile food and energy prices, so-called core inflation came in at a 2% annual rate.

Those inflation numbers could reassure the Federal Reserve’s policymakers, who have already signaled that they expect to cut their benchmark interest rate three times in 2024, reversing their 2022-23 policy of aggressively raising rates to fight inflation. Some economists think the Fed could begin cutting rates as early as May.

Nathan Sheets, global chief economist at Citi, said recent experience suggests that economic growth can remain solid even as inflation cools.

“It underscores for the Fed that they don’t have to be in a hurry” to ease borrowing rates to aid the economy, said Sheets, who thinks the first rate cut will occur in June.

The state of the economy is sure to weigh on people’s minds ahead of the November elections. After an extended period of gloom, Americans are starting to feel somewhat better about inflation and the economy — a trend that could sustain consumer spending, fuel economic growth and potentially affect voters’ decisions. A measure of consumer sentiment by the University of Michigan, for example, has jumped in the past two months by the most since 1991.

There is growing optimism that the Fed is on track to deliver a rare “soft landing” — keeping borrowing rates high enough to cool growth, hiring and inflation yet not so much as to send the economy into a tailspin. Inflation touched a four-decade high in 2022 but has since edged steadily lower without the painful layoffs that most economists had thought would be necessary to slow the acceleration of prices. The economy has repeatedly defied predictions that the Fed’s aggressive rate hikes would trigger a recession. Far from collapsing last year, the economy accelerated — expanding 2.5%, up from 1.9% in 2022.