US economic growth exceeds forecasts at 3.3%, yet uncertainty persists regarding rate cuts.

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US economic growth exceeds forecasts at 3.3%, yet uncertainty persists regarding rate cuts.

US gross domestic product expanded at an annual rate of 3.3% in the final quarter of 2023, surpassing market expectations. The Bureau of Economic Analysis reported today (25th January) that GDP growth slowed from 4.9% in the third quarter due to a variety of factors including a deceleration in private inventory investment, federal government spending, residential fixed income, and consumer spending. Imports also saw a slowdown.

The fourth-quarter figure of 3.3% growth was higher than economists’ forecasts, who had predicted US GDP to reach only 2% for the final three months of 2023.

Overall, US GDP expanded by 2.5% in 2023, up from 1.9% in 2022, indicating a resilient growth trajectory despite the fourth-quarter slowdown. Lindsay James, investment strategist at Quilter Investors, described the performance as “anything but sluggish.”

However, the data also revealed uncertainty. Attention is now focused on forthcoming US inflation data, with investors keen to ascertain whether last month’s increase in the Consumer Price Index (CPI) was an anomaly. A positive CPI result could pressure the Federal Reserve to act.

With rising real disposable incomes – up 2.5% in the fourth quarter from 0.3% in the third quarter – the Federal Reserve may postpone the timing of the first rate cut, potentially coinciding with the presidential election in November.

Economists’ forecasts for US GDP growth in 2024 vary widely, from 0 to 3.1%, indicating significant uncertainty. Similarly, inflation expectations exhibit a broad range, underscoring the challenges in predicting the economic landscape for 2024.

Neil Birrell, Chief Investment Officer at Premier Miton Investors, suggested that those anticipating early rate cuts may be disappointed, given the “much stronger than expected” figures. The GDP price index falling below estimates creates an “ambiguous” dataset for the Federal Reserve.

Ryan Brandham, Head of Global Capital Markets, North America, at Validus Risk Management, proposed that the US may encounter challenges in cutting interest rates in 2024 compared to other developed economies. The complex economic picture suggests that the road ahead remains unpredictable for policymakers and investors alike.

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