US economy grew solid 3.2% in fourth quarter, a slight downgrade from government’s initial estimate

WASHINGTON — The U.S. economy grew at a robust annual pace of 3.2% from October through December, driven by healthy consumer spending, the Commerce Department reported Wednesday, downgrading slightly from its initial estimate.

Growth in the country’s gross domestic product — the economy’s total output of goods and services — fell from a red-hot 4.9% from July through September. Fourth-quarter GDP figures have been revised down from the 3.3% pace the trade initially reported last month. US growth has now surpassed 2% for six consecutive quarters, defying fears that high interest rates would push the world’s largest economy into recession.

Rather than stumbling, the economy grew 2.5% in all of 2023, surpassing 2022’s 1.9% growth.

Consumer spending, which accounts for about 70% of U.S. economic activity, grew at an annual rate of 3% from October through December. Growing exports and spending by state and local governments also contributed to growth in the fourth quarter.

The United States is expected to continue running in 2024. The International Monetary Fund expects the U.S. economy to grow 2.1% this year – more than double forecasts for growth in the major advanced economies of Japan, Germany, the United Kingdom, France and Italy.

Voters are weighing the health of the economy ahead of November’s presidential election. Many Americans are irritated by the high prices and blame President Joe Biden. Although inflation has slowed and hourly wage increases have beaten price increases over the past year, consumer prices are still 17% higher than three years ago.

In response to resurgent inflation, the Federal Reserve raised its key interest rate 11 times between March 2022 and July 2023, taking it to the highest level in more than two decades. Higher borrowing costs have curbed the wave of inflation. Last month, consumer prices rose just 3.1% from January 2023, down from a peak of 9.1% in June 2022 and moving closer to the Fed’s 2% target.

Wednesday’s report also showed that inflationary pressures continue to ease. The Fed’s favorite price measure – the price index for personal consumption expenditures – rose 1.8% annually in the fourth quarter, up from 2.6% in the third quarter. Excluding volatile food and energy prices, so-called core inflation rose 2.1%, a slight acceleration from a 2% increase in the third quarter.

To the surprise of the Fed and most economists, progress on inflation so far has been made without causing much economic pain. Unemployment has been below 4% for 24 months in a row, the longest streak since the booming 1960s. And employers added a healthy average of 244,000 jobs per month over the past year, including more than 300,000 in both December and January.

American households are largely in good financial shape, allowing consumers to spend money. And companies have improved productivity by leveraging automation and finding ways to help employees work more efficiently.

The combination of slowing inflation, robust hiring and GDP growth has raised hopes that the Fed can pull off a rare “soft landing” — overcome inflation without triggering a recession.

Wednesday’s report was the second of three Commerce Department estimates of fourth-quarter GDP growth. The latest revision will appear on March 28.