Kiplinger's GDP Outlook: Economic Growth Surprises to the Upside

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Surprisingly strong fourth-quarter growth of 3.3% indicates the economy hasn’t lost much momentum yet. In particular, consumers and the government finished 2023 on a spending tear. Consumer purchases rose 4.6% for durable goods, and 3.4% for nondurables. Business spending was more muted but still positive, and exports were surprisingly robust despite weakness in overseas economies. 

That is all likely to change in the first half of 2024. Economic growth will slow down to take a breather. While consumer spending will likely stay robust because of good growth in disposable income, other areas are tapering off. Business spending will likely stay at the current modest rate because of high interest rates and tight bank lending standards, which will also continue to hobble the housing market. Federal government spending will gradually ebb as previous spending programs funded by Congress run their course. State and local governments have been hiring because they are still catching up after the pandemic, but they will start to cut back as their staffing levels approach normal. Exports and imports will likely revert to being a drag on growth instead of a contributor.

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The second half of 2024 is likely to be a bit better. We estimate the growth rate for all of 2024 at 2.2%, only a little slower than 2023’s 2.5%. The Federal Reserve will likely begin cutting interest rates this year, which will help boost consumer spending on housing and motor vehicles, and will help spur growth in business loans. Also, there are signs of a revival in consumer sentiment from the lows of the past two years, though it remains far below prepandemic levels.

The momentum in the economy should cause the Fed to wait until midyear to make its first interest rate cut, either at its May or June policy meeting, because it is still determined to combat inflation. Inflation is on a downtrend, but the Fed wants to make sure it doesn’t get stuck at a level higher than 2%. 

Source: Department of Commerce: GDP Data

Read more

• When is the Next Fed Meeting?
• Kiplinger's Jobs Forecast
• Kiplinger's Housing Forecast
• Kiplinger's Business Spending Forecast