The U.S. Economy Accelerated in the Second Half of 2023
In a remarkable defiance of consensus expectations, the U.S. economy maintained a solid pace of growth as 2023 progressed—which was the exact opposite of what nearly every economist anticipated at the beginning of the year.1
According to the Bureau of Economic Analysis “advance” estimate, U.S. real GDP grew at an annual rate of 3.3% in Q4, following a 4.9% increase in Q3. Now, to be fair, growth slowed from Q3 to Q4, and the “advance” estimate for Q4 is subject to change. But in my view, the exact data points here are less important than the high-level takeaway, which is that the U.S. economy performed better than nearly everyone expected last year.2
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The most prevalent concern heading into 2023 was that the U.S. economy was spiraling toward 1970s-style stagflation. Instead, we got about 2.5% full-year real GDP growth, with inflation falling from 5.5% in January 2023 to 2.6% in December 2023 (headline PCE price index). Again, virtually the exact opposite of what many feared.
There is no environment more supportive of stocks, in my view, than one where we see this level of disconnect between expectations and reality. Looking ahead, I think that means more good news for investors in 2024. Americans are still largely unhappy with the economy, and consumer sentiment has only recently rebounded from levels last seen during the 2008 Global Financial Crisis. The calls for a recession have abated, but I think we’re still far away from pessimism turning into optimism or euphoria. In other words, the wall of worry remains firmly intact.
Meanwhile, economic fundamentals within the latest batch of real GDP data look encouraging. We saw less inventory build-up and lower government spending contributions in Q4 relative to Q3. In addition, key components like consumer spending, nonresidential fixed investment (business investment), and residential fixed investment made positive contributions. Businesses spent more on intellectual property products, structures, and equipment.
In the critical consumer spending category, we saw increases across both goods and services. In the services realm, Americans traveled more, dined out, and spent more on health care. In the goods category, consumers bought more recreational goods, computer software, and pharmaceutical products. I think there’s a clear link connecting solid spending with rising wages and disposable incomes. Real disposable incomes increased 2.5% in Q4, and as seen in the chart below, wage growth continues to outpace inflation.
3-Month Moving Average of Hourly Wage Growth
A narrative I saw appear throughout last year was that the U.S. consumer was on the brink of being “tapped out,” with stimulus savings gone and the return of student loan repayments serving as a headwind. But this story has yet to show up in the data. As referenced above, wages are growing more quickly than inflation, the unemployment rate remains below 4%, and debt service payments as a percent of disposable personal income are at multi-decade lows (chart below). You wouldn’t know it based on most media reporting and sentiment indicators, but American households are arguably better off than they have been in decades.
Bottom Line for Investors
Even though most economists have backed off of recession forecasts, expectations for economic growth in 2024 are low. This sets up a relatively low hurdle for the U.S. economy to clear, in my view, and should bolster stock prices if economic growth continues on a better-than-expected track. I see economic outperformance as a distinct possibility as businesses are coming into 2024 leaner than they were in 2023, and with an earnings rebound in the offing. And consumers simply are not as tapped out as many expect them to be. They continue to benefit from higher wages, near full employment, and softening inflation.
And I didn’t even mention rate cuts.
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Disclosure
2 A Wealth of Common Sense. January 26, 2024. https://awealthofcommonsense.com/2024/01/this-is-the-best-u-s-economy-since-the-1990s/
3 BEA. 2024. https://www.bea.gov/news/2024/gross-domestic-product-fourth-quarter-and-year-2023-advance-estimate
4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
5 Fred Economic Data. January 10, 2024. https://fred.stlouisfed.org/series/FRBATLWGT3MMAUMHWGO#
6 Fred Economic Data. December 15, 2023. https://fred.stlouisfed.org/series/TDSP#
7 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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