Economy grows at surprisingly strong 3.3% pace in last quarter

Americans spend freely in spite of interest rates, prices.

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

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their 2022- 2023 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 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.

“Our expectation is for a soft landing, and it looks like things are moving that way,’’ said Beth Ann Bovino, chief economist at U. S. Bank. Still, Bovino expects the economy to slow somewhat this year as higher rates weaken borrowing and spending.

“People are going to get squeezed,’’ she said.

The economy’s outlook had looked far bleaker a year ago. As recently as April 2023, an economic model published by the Conference Board, a business group, had pegged the likelihood of a U. S. recession over the next 12 months at close to 99%.

Even as inflation in the United States has slowed significantly, overall prices remain nearly 17% above where they were before the pandemic erupted three years ago, which has exasperated many Americans. That fact will likely raise a pivotal question for the nation’s voters, many of whom are still feeling the lingering financial and psychological effects of the worst bout of inflation in four decades. Which will carry more weight in the presidential election: The sharp drop in inflation or the fact that most prices are well above where they were three years ago?

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