The U.S. economy boomed in 2023, thanks to consumers opening up wallets

The U.S. economy grew by a bustling 3.1% in 2023, shaking off recession fears and offering an upbeat picture of consumers and businesses ahead of a pivotal election year.

Gross domestic product grew even faster than many had anticipated in the last three months of the year – by an annual rate of 3.3%, according to the Bureau of Economic Analysis – offering fresh evidence that federal policymakers have managed to bring down inflation and secure a “soft landing” without major repercussions for workers or the economy.

“It’s just a perfect report: strong growth and low inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “Everything contributed to growth: consumers, businesses, government, housing, trade, inventories. All of the economic wheels were moving in the same direction.”

Vigorous consumer spending has driven the economy’s resilience over the past year. A strong job market and rising wages have made it possible for many households to keep shelling out – particularly on services such as hotels, travel and dining out – even at a time of elevated inflation.

That spending by everyday Americans accounted for most of the economy’s growth in the fourth quarter. Increased government spending, at the state, local and federal levels, as well as higher exports and more private and residential investments also lifted the latest GDP reading, which sums up the goods and services produced in the U.S. economy.

The report offered promising news on inflation. The Federal Reserve’s preferred inflation measure dropped to an annualized rate of 1.7% in the latest quarter, slipping below the Fed’s 2% goal for the first time since its post-pandemic surge. That’s raised hopes that inflation can keep coming down without the economy having to slow too much.

“The deceleration in inflation was one of the most rapid on record; only WWII, the Korean War and the double dip recessions of the early 1980s precipitated a more rapid deceleration,” Diane Swonk, chief economist at KPMG, wrote in a note Thursday.

Markets were hopeful that steady progress on inflation would allow the central bank to cut interest rates in the coming months. Both the S&P 500 and Dow Jones Industrial Average inched higher on Thursday as a result.

The economic growth figures are a political boost for President Biden, as every year of his term has seen GDP growth, despite some struggling quarters. Last year’s 3.3% expansion tops GDP growth in every year of President Donald Trump’s term, including 2019, when the economy grew by 2.95%.

“Wages, wealth and employment are higher now than they were before the pandemic,” Biden said in a statement Thursday. “That’s good news for American families and American workers.”

The surprisingly good GDP figures prompted Biden aides to launch a more aggressive push to tout the economy’s strength as the presidential campaign heats up, hoping to flip what has long been perceived as one of the president’s biggest political vulnerabilities into an asset heading into the presidential campaign season. Although Republicans remain optimistic the economy is still a potent winning message – particularly given the administration’s initial attempts to downplay price hikes in 2021 and 2022 – the GOP’s economic case has certainly gotten more difficult with inflation falling to closer to 3% from 9%.

On Thursday, the White House Council of Economic Advisers released a report showing the “blue chip” index of top economic forecasters had badly misjudged the direction of the economy, projecting much higher inflation and unemployment than turned out to be the case.

“The data tell a compelling story of an economy that has significantly defied expectations, and where persistently tight labor markets and easing price pressures are supporting macroeconomic growth,” the report stated.

It is unlikely, this pace of growth can continue. Economic expansion is expected to slow this year, as higher borrowing costs take their toll on spending by households and businesses. Americans have worked through extra pandemic savings in the last couple of years and are increasingly relying on credit cards and other debt to fuel their spending. The restart of student loan payments late last year, coupled with rising costs for basics like car insurance, medical care and child care have added to households’ strain. Delinquencies on mortgages, car loans and credit cards are inching up, according to the New York Fed.

“I suspect that as people open up those credit card bills this year, they’re going to start rethinking things,” said Beth Ann Bovino, chief economist at U.S. Bank. “They’ll be looking to spend less and trade down.”

There are other risks on the horizon: Government spending growth is expected to taper off and businesses have too much inventory on hand. Geopolitical risks, like conflict in the Middle East, are a looming threat to the global economy.

For now, strong economic growth has distinguished the United States from its peers. Europe and Britain are on the verge of recession, and China – the world’s second-largest economy – is on slippery footing. Overall, economic growth in advanced economies is expected to slow this year, to 1.4%, according to the International Monetary Fund.

Government policy played an important role in supporting the U.S. economy. The Biden administration’s efforts to fund new infrastructure and clean energy projects have created new jobs in construction, telecommunications and other fields as well as spurred $640 billion in private investments, helping bolster GDP for six straight quarters.

In all, more than $1 trillion in government spending and private money are making their way across the country, helping construct new factories, build bridges, repair roads and expand airports. That spending is propping up the job market and fueling consumer spending – perhaps artificially so, some argue.

“Growth may not be as strong as it appears,” Joseph LaVorgna, chief economist at SMBC Nikko Securities and former Trump White House economic adviser, wrote in a note to clients. “Massive government spending is keeping demand stronger than it otherwise would be.”

Despite the economy’s strong rebound from the pandemic-inflicted recession, Biden has struggled to convince voters his policies are making their lives better. Higher prices, particularly on essentials such as food, housing and utilities, have clouded Americans’ views on the economy, with inflation routinely topping the list of voters’ biggest concerns.

Although some economists still expect a mild recession this year, many appear optimistic the economy can stabilize without major job losses or a protracted downturn.

“We expect growth to slow this year, but the good news is that job gains are holding up,” Bovino said. “It’s a real have-your-cake-and-eat-it-too moment.”

The Federal Reserve has aggressively raised interest rates since last year in a bid to slow the economy enough to bring down inflation. Although its efforts are working – prices are up 3.4% from a year ago, down from a peak of 9.1% in June 2022 – many Americans are still reeling from sticker shock at grocery stores and gas pumps, where costs remain elevated from pre-pandemic levels.

Still, there are signs that Americans are slowly starting to feel better about the economy as inflation eases. The consumer confidence level picked up in November and December. It is unclear, though, whether that will translate to political points for the White House.

Anthony Reilly, who owns a barber shop in Philadelphia, says business has gradually slowed in recent months as clients rethink their spending. The usual holiday boom, which begins just before Thanksgiving, wasn’t quite as dramatic this time around. January, too, is shaping up to be slower than usual.

“It feels like things are a little more up in the air, like everyone is starting to tighten their purse strings,” he said. “It’s not scary-dead, but also not crazy busy like it used to be.”

Bookings at Flowertown Bed and Breakfast in Summerville, South Carolina, are up across the board: More guests are staying overnight, and demand for weddings, baby showers and other events is higher than it has been in years.

“I’ve been surprised at just how steady things have been,” owner Carol Grant said. “I’m at the grocery store every other day, and the prices are just atrocious, but people are still spending. There hasn’t been any kind of slowing.”