WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
Is It Déjà Vu All Over Again?
ARCHIVE: Week of January 29, 2024
Here we are a year later, and investors are still asking themselves the same question: is the U.S. economy headed for a recession? Obviously, only one month into the new year, drawing any conclusions is a difficult task, to say the least. Instead, let’s see how the end of 2023 fared, and perhaps we can glean some insights for the future.
Certainly, the money and bond markets drew their own conclusions regarding where growth was headed in 2024, and that’s definitely to the downside. This point was underscored by the drop of more than 100 basis points (bps) in various Treasury yields from their peak readings in October. But what the bond market is finding out instead as we begin the new year is that, once again, the U.S. economy maintained its resilient status as we ended 2023 and perhaps could have carried momentum into Q1 2024.
Last week, the Bureau of Economic Analysis (BEA) released its Advanced Estimate for Q4 2023 real GDP, and it surprised to the upside, beating consensus forecasts in a convincing fashion. To provide perspective, for the final quarter, the BEA reported that the economy grew by +3.3%, as compared to the estimate of +2.0%. Interestingly, the Fed had acknowledged how growth had been slowing at its December FOMC meeting, but that was from a +4.9% pace in Q3. We would argue that the BEA’s advanced estimate for Q4 was certainly visibly above what the policy maker was expecting. To put it into some context, the economy grew at an average rate of +4.1% during the second half of last year. At one point, the expectation was that growth was going to stall out during this timeframe, but instead, it essentially doubled the rate of expansion investors had become accustomed to pre-COVID-19.
It should come as no surprise that personal consumption was a major contributor to Q4 growth. Indeed, the continued solid labor force setting has been a central underpinning to American households. In addition, fixed investment, another of the five cylinders of the economic engine, also came in on the plus side of the ledger, with nonresidential spending on structures, equipment and intellectual property products providing support. Even residential outlays posted a modest positive contribution.
Inventories and net exports were positive contributors as well. However, data for these two “cylinders” is not complete in the BEA’s advanced GDP release, so we’ll be watching to see if there are any revisions down the road.
Perhaps one of the more intriguing aspects of the GDP report came from the government sector. Government outlays provided the second-largest boost to growth, behind only personal consumption. While federal spending rose for the sixth consecutive quarter, state and local expenditures registered even higher results.
While investors continue to await the effects of the Fed’s cumulative 525 bps worth of rate hikes on the economy, the government side of the equation could be serving as an integral offset.
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