US Q4 growth revised higher; labour market is still strong

The US economy grew faster than previously estimated in the fourth quarter, boosted by strong consumer spending and business investment in nonresidential structures like factories and healthcare facilities.
The report from the Commerce Department on Thursday also showed profits rising at a solid clip last quarter, driven by nonfinancial corporations. Increasing profits, together with rising worker productivity, could encourage companies to retain their employees.
Labour market resilience is underpinning consumer spending, keeping the economy afloat despite dire predictions of a recession in the aftermath of 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022 to quell inflation.
“The consumer will be front and centre when it comes to gauging the strength left in this recovery, and their spending that has shifted to services will be critical this year,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
Gross domestic product increased at a 3.4% annualised rate last quarter, revised up from the previously reported 3.2% pace, the Commerce Department’s Bureau of Economic Analysis said in its third estimate of fourth-quarter GDP.
The revision reflected upgrades in consumer spending, business investment as well as state and local government spending, which offset downgrades to inventory accumulation and exports. Economists polled by Reuters had expected GDP growth would be unrevised.
The economy is growing above what US central bank officials regard as the non-inflationary growth rate of 1.8% and continues to outperform its global peers. The economy grew at a 4.9% pace in the July-September quarter. It expanded 2.5% in 2023, an acceleration from 1.9% in 2022. Growth estimates for the first quarter are converging around a 2.0% pace.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.3% rate, adding 2.20 percentage points to GDP growth. It was previously estimated to have grown at a 3.0% pace. The upward revision was in services.
The upgrade to business spending reflected higher outlays on manufacturing as well as commercial and healthcare structures than previously estimated. Spending on intellectual property products was also revised up, while the decline in outlays on equipment was not as steep as previously estimated.
Corporate profits including inventory valuation and capital consumption adjustments increased $133.5bn in the fourth quarter after rising $108.7bn in the July-September quarter. Profits of domestic nonfinancial corporations increased$136.5bn, while those of financial corporations rose $5.9bn. That more than offset an $8.9bn decline in profits from the rest of the world.
When measured from the income side, the economy expanded at a robust 4.8% rate. Gross domestic income (GDI) increased at a 1.9% pace in the July-September quarter. In principle, GDP and GDI should be equal, but in practice differ as they are estimated using different and largely independent source data.
A widening gap between GDI and GDP in prior quarters had raised concerns among some economists that the economy was not as strong as suggested by the GDP figures. The surge in GDI reflected higher wages and profits.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 4.1% rate last quarter after advancing at a 3.4% pace in the third quarter.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 210,000 for the week ended March 23. Economists had forecast 212,000 claims in the latest week.
Claims have been hovering in a 200,000-213,000 range since February. Most employers are retaining their workers despite a rash of high-profile layoffs at the start of the year.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 24,000 to 1.819mn during the week ending March 16, the claims report showed. The so-called continuing claims covered the period during which the government surveyed households for March’s unemployment rate.
Continuing claims were little changed between the February and March survey periods. The unemployment rate was at 3.9% in February.