Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
The economy grew at a faster-than-expected pace last quarter, while the Fed's favorite measure of inflation continued to decline. Welcome to a very happy edition of The Line.
Economic Growth Much Higher than Expected in 4Q23
You can add GDP to the list of “higher-than-expected” 4Q23 readings, as the economy grew at a 3.3% annual rate last quarter. This blew away the 2% number Wall Street was expecting and was higher than any economist’s forecast that I could find. I know I’ve warned that higher-than-expected data can be a bad thing as it can bring mortgage rates higher, but this GDP report is all good news. Here are the highlights:
All the major components of GDP were positive in 4Q23, led by a 2.8% increase in personal consumption. Remember that personal consumption is the most important part of GDP, as it accounts for about 70% of the total number.
Gross private domestic investment rose 2.1%, government consumption was 3.3% higher, and exports (+6.3%) rose much faster than imports (+1.9%).
For all 2023, GDP rose at a 2.5% rate, much faster than anyone thought at the beginning of the year.
The calculation for GDP is:
GDP= C + I + G + NX
Here’s what each of those letters mean, and how they contributed to fourth quarter GDP:
C = Personal consumption expenditures +1.91%
I = Gross private domestic investment +0.38%
G = Government consumption expenditures and gross investment +0.56%
NX = Net exports -0.43%
Add those up, and you get 3.3%.
Now, for part 2 of our happy news we present our good friend PCE.
The Fed's Favorite Inflation Gage Up 2.9% From a Year Ago
The core personal consumption expenditures index—or core PCE to his buddies—rose 0.2% in December and was 2.9% higher than a year ago. Economists were expecting a 0.2% gain from the prior month and 3% from the prior year, so this data is good news.
The Fed likes core PCE because it measures what people actually spend, rather than just the change in prices that the CPI presents. We all know that when prices for a specific good rise sharply, consumers will often look for a cheaper alternative. For example, if the price of steak goes up people may buy more chicken.
Add the GDP and PCE reports together, and you get the soft landing we were looking for. Inflation has come down sharply, while economic growth has remained strong. That said, I still don’t expect the Fed to start cutting rates until the second half of 2024. The economy doesn’t need lower rates right now, so there’s no reason to risk stoking inflation. For now, let's just enjoy this good news.