US GDP (Q4 2023 – first estimate)

The recession that wasn’t


  • Real GDP surprised on the upside with a robust 3.3% annualized advance in Q4 – capping a year of above-trend growth for the US economy. Final sales rose 3.2% while inventory investment added 0.1 percentage points (ppt) to growth. Consumer spending was the main engine of growth in Q4, rising 2.8%, while government spending also grew robustly. Meanwhile, business fixed investment saw a modest 1.9% advance, and net international trade added 0.4ppt to GDP growth amid a strong advance in exports.

  • Overall, the economy sailed through 2023 with growth averaging 2.5% for the year, handily surpassing consensus expectations for a recession. Looking ahead, we continue to see a soft landing as the most likely outcome this year even if a collection of headwinds and risks means that recession odds are around 35%.

  • While there is no doubt the economy still has some winds in its sails, we believe cooler days are on the horizon. Consumers will likely remain cautious with their spending as they confront “cost fatigue” and less vibrant labor market conditions. Business leaders will continue to exercise more scrutiny with their investment and hiring decisions amid still-elevated interest rates and softer final demand growth.

  • On the bright side, this period of slower growth should set the stage for a healthier economic environment in 2025, featuring a more balanced labor market with a modestly higher unemployment rate, lower interest rates and inflation near the Fed’s 2% target. Overall, we foresee real GDP growing 2% in 2024, with a slow start to the year and gradually accelerating momentum into 2025.

  • On the inflation front, price pressures eased visibly in Q4 with headline inflation cooling 0.6ppt to 2.7% year over year (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.

  • The recent string of positive economic surprises means the Fed will be in no rush to cut interest rates in the near-term and stick to a cautious approach. But with the Fed’s favored inflation gauge – the core PCE deflator – likely to reach the critical 2.5% y/y threshold in the coming months, we anticipate 100 basis points (bps) of Fed rates cuts this year at the May, June, September and December meetings.

In the details

The 3.3% real GDP advance featured a 3.2% increase in real final sales and a 0.1ppt contribution to growth from inventories. Growth in real final sales to domestic purchasers (which excludes the net international trade components) picked up to 3% – the strongest advance since Q1 2022 – while real final sales to private domestic purchasers (also excluding government spending) rose 2.7%. On a y/y basis, real GDP climbed 3.1% – its strongest advance since Q1 2022.

Consumer spending grew 2.8% in Q4 following a robust 3.1% gain in Q3. Spending on services advanced 2.4% on broad-based gains including in transportation (+5.9%), recreation (+5.1%) and food services and accommodation (+7.6%). Outlays on nondurables grew 3.4% on strong clothing (+6.0%) purchases while spending on durables increased 4.6% driven by stronger spending on furniture (+4.1%) and other recreations goods (+10.9%).

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. We project that consumer spending will grow around 1.7% in 2024 following a 2.2% advance in 2023.

Residential investment saw a modest 1% increase following a 6.7% rebound in Q3 but remains down 19% from its 2021 Q1 peak. While the worst of the housing sector correction is most likely behind us, we anticipate sluggish growth in 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 picked up to 1.9% in Q4 following a 1.5% advance in Q3. Structures investment growth cooled to 3.3% after a 11.2% surge in Q3 while equipment investment growth picked up to 1% following a 4.4% contraction in Q3. The rebound was driven by stronger spending on information processing equipment (+17.4%) and industrial equipment (+3.7%). Intellectual property investment advanced a moderate 2.1%.

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 rose a robust 3.3% annualized after growth of 5.8% in Q3. Federal government outlays rose a more moderate 2.5% as defense spending cooled. Spending at the state and local consumptions level also rose a healthy 3.7%.

Net international trade added 0.4ppt to GDP growth, as the robust 6.3% growth in exports was only partially offset by a modest 1.9% advance in imports. Looking ahead, we anticipate cooler imports as domestic activity slows and moderating exports as global activity remains subdued. Inventories added 0.1ppt to real GDP growth in Q4 as businesses slowed their restocking effort following a rapid accumulation in Q3 ahead of the holidays.

On the inflation front, price pressures eased visibly with headline inflation cooling 0.6ppt to 2.7% – the lowest since Q1 2021 – and core 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.