Investing.com -- The U.S. economy grew at a faster than anticipated rate in the fourth quarter, as activity remained robust even as it shows signs of slowing back down to a pre-pandemic pace.
Real gross domestic product (GDP) in the world's largest economy expanded at an annual rate of 3.3% in the three months to the end of December, decelerating from 4.9% in the third quarter, according to a key first reading from the Commerce Department. Economists had predicted a mark of 2.0%.
Consumer spending for both goods and services was the main driver of growth, according to Kathy Jones, Chief Fixed Income Strategist at Charles Schwab (NYSE:SCHW), in a post on social media platform X.
When measured against the year-ago period, GDP increased by 3.1%, adding to mounting evidence of the resilience of the U.S. economy despite historically elevated interest rates. For the year as a whole, the number rose by 2.5%, up from 1.9% in 2022. Jones called the performance "remarkable," particularly in the face of soaring borrowing costs.
At the start of 2023, concerns were high that these tighter financial conditions -- a tactic by the Federal Reserve aimed at corraling inflation back down to the central bank's 2% target -- could lead to a steep downturn in growth.
However, Thursday's data indicates that America is still on track for a so-called "soft landing," in which the Fed successfully quells price gains without sparking an economic meltdown.
Expectations for such a scenario have helped fuel a recent rally in stock markets, but Fed officials have stressed that it is not an inevitability and more data will need to be seen before they are assured that a soft landing will actually happen.
The GDP figure could factor into this outlook, although analysts at ING have argued that the publication of the Fed's preferred measure of price growth on Friday will be "far more important" for rate-setters.
While the central bank is widely tipped to keep borrowing costs on hold at a more than two-decade high of 5.25% to 5.50% at its upcoming policy meeting later this month, the GDP and inflation data this week may help determine how policymakers approach potential rate cuts in 2024.
Indications of lingering economic strength and easing inflation may persuade the Fed that it does not need to move quickly to lower borrowing costs. Expectations late last year that the Fed would roll out reductions in early 2024 have waned, with the CME Group's (NASDAQ:CME) closely-watched FedWatch Tool now forecasting the first cut in May.
"Attention concerning [first-quarter] activity now becomes more focused," analysts at Evercore ISI said in a note. "For now, the fixed income market is discounting the risk of a near term recession."
The rate-sensitive 2-year U.S. Treasury yield and the benchmark 10-year yield, which typically move inversely to prices, both declined, while the dollar index -- a gauge of the greenback against a basket of currencies -- inched up slightly. U.S. stocks climbed in early trading following the report.
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