By Jeanette Garretty, Chief Economist
The fourth and final quarter of 2023 saw a resolution of a number of important questions: Would inflation decelerate as hoped? Would the US economy falter? Would the Federal Reserve ever stop raising interest rates? These three questions dominated investor sentiment for much of 2023 and, in keeping with economics being called the dismal science, most economists were exceedingly skeptical about a scenario best described as “Fed Success”. Yet, in fact, this is exactly what the fourth quarter confirmed. By the end of the quarter, it was clear that inflation had fallen below 3% while the US economy grew a robust 3%+, and the Federal Reserve was done with interest rate hikes. A strong labor market growing at a somewhat slower (but more sustainable) pace than earlier in the year lifted consumer and business confidence over the course of the final months of 2023, and supported household income growth that fueled a surprisingly positive holiday sales seasons. It should also be noted that a few storm clouds gathered on a far-off horizon, however. US consumer debt rose to levels higher than before the pandemic, and while credit delinquencies have risen, banks profess not to be concerned. Also, economic growth at the end of 2023 for some of our major trading partners — Europe, the UK, and China—came in much weaker than once-expected, with the economic problems in China being especially worrisome because they appear to be structural, i.e. related to demographic and governance changes that may not be easily resolved. Finally, the geo-political developments of the past few months have reminded us that we live in a very uncertain, fractious world, although the US economy thus far has weathered these global storms quite well.
Source: Bureau of Economic Analysis (BEA); OECD Economic Outlook – November 2023
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