US GDP (Q4 2023 — third estimate)

US economy gliding toward slower growth  

  • The final GDP report for the fourth quarter confirms the economy grew at a robust pace at the end of last year but tells little about current economic momentum. Preliminary economic data for Q1 suggest the US economic engine is still running, albeit at a slower pace. We expect consumer spending will grow around 2.3% annualized in Q1, which puts the economy on track for moderate growth in the first quarter of 2024.

  • The first look at the income side of the economy showed that real gross domestic income (GDI) surged 4.8% in Q4, marking the first quarter that GDI outpaced GDP growth since Q3 2022. While the two measures should be equivalent in theory, growth in real GDI had lagged growth in real GDP for four consecutive quarters. Gross domestic output (GDO) – the average of GDP and GDI that is considered a more accurate measure of economic growth – grew at a robust 4.1% annualized pace, the strongest advance in two years.

  • Today's report also revealed that corporate profits rose substantially in the fourth quarter to a new record high as faster productivity is keeping a lid on unit labor costs. Before-tax corporate profits rose by the most since Q2 2022, up $133b following a $109b advance in the prior quarter. And profit margins expanded for a second consecutive quarter, up 0.3 percentage points (ppt) to 12.2% of GDP.

  • Overall, the US economy is gradually decelerating due to more scrutinous consumers and business leaders in a high-cost and high-interest rate environment. Following a robust 2.5% advance last year, we foresee real GDP growing 2.3% in 2024. However, the average growth will mask a slowing underlying trend with economic momentum likely to slow from 3.1% year over year (y/y) in Q4 2023 to 1.5% y/y in Q4 2024.

  • Inflation stickiness is a risk but not our base case. The disinflationary process will remain bumpy, and there could be other monthly readings that surprise to the upside. But slower consumer demand growth, increasing price sensitivity, declining rent inflation, moderating wage growth and tight monetary policy point to further disinflationary momentum in 2024.

Real GDP growth was revised up 0.2ppt to 3.4% in Q4 2023. Economic momentum picked up considerably over the course of last year with GDP growth accelerating from 0.7% y/y in Q4 2022 to 3.1% y/y in Q4 2023. In contrast, GDI growth stagnated over the same period before rebounding to 1.9% y/y in Q4.

The upward revision to real GDP in Q4 was driven mostly by stronger consumer spending, nonresidential business investment and government spending. Final sales rose a robust 3.9% while inventory accumulation subtracted 0.5ppt to real GDP growth. Final sales to private domestic purchasers – showing the contributions from consumer spending, residential investment and business investment – maintained a solid pace in Q4 and grew 3.6%.

Consumer spending growth remained the main engine of growth, growing a revised 3.3% with the upgrade entirely reflecting weaker growth in services outlays. Recent retail sales and consumer spending data indicate that consumers are still willing to spend, albeit at a slower pace. We expect the combination of cost fatigue, rising debt servicing burdens and tighter credit to weigh on spending in coming quarters, especially as employment and income growth moderate. Overall, we project that consumer spending will grow around 2.0% in 2024 following growth of 2.2% in 2023.

Business investment grew a stronger 3.7%, above the prior estimate of 2.4%. The upward revision reflected stronger growth in structures investment (+10.9%) and intellectual property investment (+4.3%) while equipment investment (-1.1%) saw a milder contraction than previously estimated. The latest data on core durable goods orders and shipments point to a mild increase in equipment investment in Q1.

Residential investment growth was revised slightly lower by 0.1ppt to 2.8%, marking the second consecutive quarter of positive growth since Q1 2021. While housing activity is showing signs of consolidation, any rebound is likely to be constrained by still depressed affordability and constrained income growth. Construction activity is, however, still benefiting from a severely undersupplied housing market.

Government spending growth was revised up 0.4ppt to 4.6% annualized. Federal government outlays rose 2.4% driven by a 4.8% advance in nondefense outlays. Spending at the state and local consumptions level rose a healthy 6.0%.

Net international trade remained a modest drag on GDP growth as both imports and exports were revised modestly lower. Specifically, the strong 5.1% growth in exports was partially offset by a 2.2% increase in imports. Looking ahead, we anticipate modest imports as domestic activity slows and moderate exports as global activity remains subdued. Inventories were a larger drag than previously estimated, subtracting 0.5ppt to real GDP growth in Q4.

On the inflation front, price pressures eased visibly with headline personal consumption expenditures (PCE) inflation cooling 0.5ppt to 2.8% – the lowest since Q1 2021 – and core PCE inflation softened 0.6ppt to 3.2% – also the lowest since Q1 2021.

At last week’s post Federal Open Market Committee meeting press conference, Fed Chair Jerome Powell noted that the stronger-than-expected inflation readings in January and February were more noise than signal and reiterated that it would likely be appropriate to start easing policy at some point this year. We continue to expect the onset of the Fed easing cycle in June and believe the Fed is likely to proceed with three rate cuts in 2024.

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.