US GDP (Q4 2023 — second estimate)

US economy entered 2024 with some wind in its sails 
 

  • Real GDP growth was revised 0.1ppt lower to 3.2% annualized in Q4 – still the largest advance since Q4 2021. However, the growth mix was more favorable, suggesting the economy carried even sturdier underlying momentum heading into 2024. 

    • Consumer spending growth was revised higher to a sturdy 3% on stronger growth in services outlays. 

    • Business investment grew a modest 2.4% on a notable upward revision to growth in structures investment, while equipment investment was now seen contracting. 

    • Residential investment was revised up to a firmer 2.9% advance. 

    • Government spending grew an upwardly revised 4.2% on accelerating state and local outlays.

    • Meanwhile, business inventories are now estimated to have been a 0.3ppt drag on GDP growth in Q4 while the positive contribution from net trade was slightly downgraded to 0.3ppt on stronger import growth. 

    • Final sales to domestic purchasers were revised higher and grew at a strong 3.1% annualized pace in Q4.
       
  • On the inflation front, price pressures eased visibly in Q4 with headline inflation cooling 0.5ppt to 2.8% y/y – the lowest since Q1 2021 – and core personal consumption expenditures (PCE) inflation softened 0.6ppt to 3.2% y/y – also the lowest since Q1 2021. We foresee headline and core PCE inflation ending the year close to the Fed’s 2% target at around 2.2% y/y.

  • Noisy economic data at the start of the year has made the outlook more difficult to assess. Cutting through the noise, the economic picture hasn’t changed much. Our view remains that a soft landing is likely as economic conditions gently cool and inflation gradually reverts to the Fed’s 2% target. We see the US economy growing 2.2% in 2024, partly reflecting the strong carryover from 2023, following real GDP growth of 2.5% last year.

  • Consumers will show more caution with their outlays as “cost fatigue” gradually curbs willingness to spend, but ongoing disinflation should support positive real household income growth. And business leaders will continue to exercise more scrutiny with their investment and hiring decisions amid still-elevated interest rates and softer final demand growth. 

  • We continue to see the Fed starting its easing cycle in May, but recent upside surprises in economic and inflation data along with Fed officials’ commitment to proceed cautiously increase the odds of a June onset. We expect a total of 100 basis points (bps) of rates cuts this year. 
     

In the details
 

Consumer spending rose an upwardly revised 3%, in line with the strong 3.1% gain in Q3. Spending on services advanced a sturdier 2.8% with the gain driven by strong spending on food services and accommodation (+7.9%), recreation (+4.1%) and healthcare (+6%). Outlays on nondurables grew 3.3% on strong gasoline (+4.3%) and clothing (+3.6%) purchases while spending on durables increased 3.1% driven by stronger spending on recreation goods (+7.3%). Looking ahead, we expect consumer spending growth to downshift in the coming months as labor market momentum softens and cost fatigue sets in, though momentum should remain positive. 
 

Residential investment saw a firmer 2.9% increase following a 6.7% rebound in Q3 but remains down 18% from its 2021 Q1 peak. While the worst of the housing sector correction is most likely behind us, we anticipate sluggish growth H1, and any rebound this year is likely to be constrained by depressed affordability and constrained income growth. Construction activity is, however, likely to benefit from a severely undersupplied housing market where vacancy rates are historically low.
 

Business investment growth was modestly upgraded to a 2.4% advance compared to 1.9% initially reported. Stronger gains in structures investment and intellectual property were offset by downward revisions to equipment spending. With headwinds such as elevated interest rates, tight credit conditions and sluggish global demand still blowing, business spending should remain under pressure in the near term. We foresee a gradual recovery later this year as global and domestic demand firms and interest rates decline.
 

Government spending was also somewhat stronger, up 4.2% annualized compared to 3.3% initially reported. Meanwhile, net trade made a slightly smaller contribution to GDP growth, adding 0.3ppt to growth amid an upwardly revised 2.7% advance in imports. Inventories subtracted 0.3ppt to real GDP growth in Q4, compared to a 0.1ppt positive contribution previously reported, as businesses slowed their restocking effort following a rapid accumulation in Q3. 
 

On the inflation front, price pressures eased visibly with headline inflation cooling 0.5ppt to 2.8% – the lowest since Q1 2021 – and core personal consumption expenditures (PCE) inflation softened 0.6ppt to 3.2% – also the lowest since Q1 2021. This year, the ideal disinflation combo of slower final demand growth, declining shelter cost inflation, narrower profit margins, moderating wage growth and still-tight monetary policy should push headline PCE and core PCE inflation toward the Fed’s 2% target by year-end to around 2.2% y/y in Q4.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.