Robust GDP Growth Adds to Hopes of a Soft Landing

The U.S. economy grew faster than expected in Q4 2023, further fueling hopes that a soft landing can be achieved in the fight against inflation. According to the BEA's preliminary estimate of U.S. gross domestic product for the fourth quarter and full year 2023, the economy grew at an annualized rate of 3.3 percent in Q4, capping off a surprisingly strong 2023 that had been expected to end in recession by many commentators at the beginning of the year. While the latest reading marks a slight deceleration from downwardly revised 4.9 percent growth in the previous quarter, it still beats consensus estimates by a significant margin, as economists had predicted 2-percent growth for the fourth quarter.

Perhaps as importantly, the strong GDP report was accompanied by a further cooling of prices for personal consumption expenditure (PCE), the Fed’s go-to inflation gauge. The PCE price index increased at an annual rate of 1.7 percent in Q4 2023, down from 2.6 percent in the previous quarter. The core PCE index, excluding food and energy, increased 2.0 percent for the second consecutive quarter, hitting the Fed's inflation target right on the nail. Adding the fact that the labor market remains relatively strong with unemployment hovering below 4 percent, it looks like all the ingredients for the coveted soft landing are in place.