Daily Management Review

US Economy Maintains Growth With Aid From Consumers And The Labour Market


US Economy Maintains Growth With Aid From Consumers And The Labour Market
The U.S. economy expanded faster than expected in the fourth quarter, owing to strong consumer spending and business investment in nonresidential infrastructure such as factories and healthcare facilities.
Profits rose at a respectable rate last quarter, according to a Commerce Department data released on Thursday, with nonfinancial firms driving the increase. Increasing profits, combined with rising worker productivity, may encourage businesses to retain their personnel, thereby extending the economic expansion.
The economy has shrugged off fears of a recession following the Federal Reserve's 525 basis point interest rate hikes since March 2022 to combat inflation. Though progress has slowed, it continues to outperform its global peers.
The study, which also revealed that underlying inflation pressures eased last quarter, did not modify predictions that the US central bank will begin decreasing rates in June.
"The economy is in good shape," said Bill Adams, chief economist at Comerica Bank in Dallas. "It is operating on a more even keel than during the pandemic and its immediate aftermath."
Gross domestic product expanded at a 3.4% annualised rate last quarter, up from the previously reported 3.2% pace, according to the Commerce Department's Bureau of Economic Analysis' third estimate of fourth-quarter GDP.
The revision included increases in consumer expenditure, business investment, and state and local government spending, which offset declines in inventory accumulation and exports. Reuters polled economists, who predicted no revisions to GDP growth.
The economy is expanding faster than the Fed's 1.8% target for non-inflationary growth. It expanded at a 4.9% rate in the July-September quarter and 2.5% in 2023, up from 1.9% in 2022. Estimates for first-quarter growth are approximately 2.0%. Core inflation increased by 2.0% last quarter, down from 2.1% the previous quarter.
Wall Street stocks were little changed heading into the Good Friday weekend. The dollar strengthened versus a basket of currencies. US Treasury prices were mixed.
Consumer spending, which contributes for more than two-thirds of US economic activity, grew by 3.3%, contributing 2.20 percentage points to GDP growth. It was earlier predicted to have expanded at a 3.0% rate. The upward modification was in services.
The increase in business spending represented bigger outlays for manufacturing, commercial, and healthcare structures than previously expected. Spending on intellectual property items was also increased, although the fall in equipment outlays was not as severe as originally thought.
Inventory investment was reduced to $54.9 billion, down from the originally expected $66.3 billion. While this detracted 0.47 percentage points from GDP growth, the outlook for this year is positive. Stronger consumer spending last year, along with forecasts of moderation this year, likely contributed to the slower pace of inventory accumulation.
"We anticipate that inventory accumulation will stabilize, then begin to pick up again over the next few years," said Michael Pearce, deputy chief U.S. economist at Oxford Economics in New York. "That turn in the inventory cycle will help support GDP growth this year and make the slowdown gradual."
Last quarter, almost all industries contributed to growth, with nondurable goods manufacturing leading the way, followed by retail trade, durable goods manufacturing, and healthcare and social assistance. However, agriculture, wholesale trade, and the arts, as well as amusement and recreation, were minor drags.
Corporate earnings grew by $133.5 billion, including inventory value and capital consumption adjustments, following a $108.7 billion gain in the July-September period. Domestic nonfinancial enterprises' earnings increased by $136.5 billion, while financial institutions' profits increased by $5.9 billion, more than offsetting the rest of the world's profit loss of $8.9 billion. Profit margins were solid.
"While firms have generally pulled back on making large capital expenditures, decent year-end profitability suggests businesses entered 2024 in adequate financial shape," said Shannon Grein, an economist at Wells Fargo in Charlotte, North Carolina. "To the extent continued profitability enables hiring, spending could be sustained."
Higher profits, combined with rather robust salary increases, boosted the revenue side of the growth ledger. Gross domestic income (GDI) increased at a strong 4.8% rate, up from 1.9% in the July-September quarter.
In theory, GDP and GDI should be the same, but they are not since they are estimated using separate and generally independent source data. The substantial narrowing of the gap between GDP and GDI should allay fears that the economy's health was being exaggerated.
The average of GDP and GDI, often known as gross domestic output and seen to be a better measure of economic activity, climbed by 4.1% last quarter after rising by 3.4% in the previous quarter.
A separate report from the Labour Department indicated that initial requests for state unemployment benefits declined 2,000 to a seasonally adjusted 210,000 for the week ending March 23. Economists had expected 212,000 claims in the most recent week.
Despite a slew of high-profile layoffs at the start of the year, claims have remained between 200,000 and 213,000 since February.
The number of people getting benefits after the first week of aid, which is a proxy for hiring, grew by 24,000 to 1.819 million during the week ending March 16, according to the claims report. The so-called continuous claims period included the time when the government surveyed families to determine the March unemployment rate.
Continuing claims showed little change between the February and March survey periods. The unemployment rate stood at 3.9% in February, 
"The labor market is becoming better balanced between demand for and supply of workers, which will help moderate upward wages pressures," said Stuart Hoffman, senior economic advisor at PNC Financial in Pittsburgh, Pennsylvania.