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The US gross domestic product (GDP), a key indicator of economic growth, grew slower in Q4 than the previous quarter but surpassed economists’ estimates. Consumer spending was the primary catalyst behind the expansion, raising the likelihood of a soft landing.

GDP Grew 3.3% in Q4 and 2.5% in the Entire 2023

The US economy exhibited a 3.3% annual growth rate in Q4, down from the 4.9% reading in the prior quarter but still above economists’ expectations. According to the Commerce Department, the consensus estimate was 1.7%, while models from the Federal Reserve Bank of Atlanta and the New York Fed predicted 2.4%.

For the entire 2023 year, real GDP saw a 2.5% increase in 2023, outperforming the estimated 2.4% growth and the 1.9% uptick observed in 2022.

The primary driver of this growth was consumer spending on both goods and services, highlighted Kathy Jones, Chief Fixed Income Strategist at Charles Schwab.

Compared to the same period in the previous year, GDP witnessed a 3.1% increase, providing further evidence of the US economy’s resilience despite historically high-interest rates. The overall annual growth rose to 2.5%, a notable improvement from the 1.9% recorded in 2022. Jones characterized this performance as “remarkable,” especially considering escalating borrowing costs.

Soft Landing Still Possible

Despite elevated interest rates and inflation, consumer spending remains a consistent driver of the US economy’s growth. Notably, according to the University of Michigan, consumer sentiment reached its highest level since July 2021 in January.

Damian McIntyre, portfolio manager at Federated Hermes, thinks that robust consumer sentiment has further alleviated recession risks and increased the odds of the much-discussed soft landing.

“The consumer, boosted by a strong job market and wage growth, has trounced last year’s recession fears. This report likely reduces rate cuts in 2024 and is another strong indication that Jerome Powell could get his soft landing.”

– wrote Damian McIntyre, portfolio manager at Federated Hermes.

A soft landing refers to a gradual and controlled slowdown in economic growth engineered by central banks to prevent overheating without triggering a recession.

Moderating inflation is another factor that could help the Fed achieve this goal. Despite a few unexpected upticks, the consumer price index (CPI) has been on an overall downtrend since reaching a 4-decade high in June 2022.

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