The US economy grew at a faster rate than expected in the fourth quarter, capping off a year many expected to end in recession with one final economic surprise.
The Bureau of Economic Analysis's advance estimate of fourth quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 3.3% during the period, faster than consensus forecasts. Economists surveyed by Bloomberg estimated the US economy grew at an annualized pace of 2% during the period.
The reading came in lower than third quarter GDP, which was revised down to 4.9%. For the year, the US economy grew at an annualized rate of 2.5%, up from 1.9% in 2022.
The GDP release highlights the resilience of the US consumer despite ongoing concerns of a slowdown. It's the latest in a string of economic data releases that show the US economy ended 2023 on solid ground as investors closely watch to see if the Fed can achieve its vaunted "soft landing," in which inflation returns to the 2% goal without a severe economic downturn.
Economic output hit its highest levels in seven months in January, according to the latest S&P Flash PMI release. A recent reading on consumer spending came in higher than expected with December's retail sales number. And the labor market hasn't shown severe signs of cooling off, with the latest reading of weekly jobless claims hitting its lowest level since September 2022.
"The economy [fared] noticeably better than expected in the final three months of last year, reinforcing our view that market expectations for the Federal Reserve to cut interest rates as early as March is premature," Oxford Economics chief US economist Ryan Sweet wrote in a note to clients on Thursday.
But Sweet did note that the release had some positives for investors hoping Fed rate cuts are coming sooner rather than later. The positive growth has combined with further inflation declines, setting the stage for a potential soft landing. The "core" Personal Consumption Expenditures Index showed prices increased at a 2.0% rate compared to the prior quarter, in line with the Fed's 2% goal for inflation.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
"The Fed will have to ease unless they have very good reasons to think the economy is about to re-strengthen or inflation somehow will rebound," Pantheon Macroeconomics Ian Shepherdson wrote in a note to clients. "We doubt those arguments can be made with confidence, so we expect the first easing in March or May."
Josh Schafer is a reporter for Yahoo Finance.
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