A “Bustling” GDP Report Caps Off 2023’s Economic Growth
“The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized,” Ben Casselman wrote in the New York Times this morning. The Gross Domestic Product for the fourth quarter of 2023 came in above expectations, at 3.3%.
And for the whole year of 2023, GDP grew far past the expectations of most everyone in the economic mainstream. Abha Bhattarai writes at the Washington Post that “The U.S. economy grew by a bustling 3.1 percent in 2023, shaking off recession fears and offering an upbeat picture of consumers and businesses ahead of a pivotal election year.”
We don’t spend a whole lot of time talking about GDP in this newsletter because the measurements that GDP incorporates are more likely to reflect the economic health of the wealthy executives in the corner offices than of the workers on the manufacturing lines and in the cubicles. But this report is important because virtually every mainstream economist began the year with dire warnings of an impending recession. Instead, setting aside the 2021 post-pandemic GDP surge of 5.95%, the economy last year grew faster than any time since 2005, when the annual GDP was 3.5% .
Consumers Finally Believe the Economy Is Headed in the RIght Direction
You should read Sam Ro’s TKer newsletter on all the healthy economic signs we’ve seen in the past six months. The whole edition is packed with good news about industrial production, home sales, and much more, but I wanted to highlight two of the most important figures for middle-out economics. First, despite the fact that many economists were predicting a soft holiday season, retail sales increased by .6 percent in December, reaching an all-time high.
And Ro also notes that consumers are starting to feel better about the economy after two years of doldrums inspired by price increases. In fact, January’s edition of the University of Michigan survey reported that “Consumer sentiment soared 13% in January to reach its highest level since July 2021, showing that the sharp increase in December was no fluke. Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations. Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended.”
Because working Americans power the economy with their spending, this is excellent news for the economy heading into 2024. Not only are Americans spending more, but they’re starting to feel optimistic about their spending again: “Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” reported the University of Michigan. There are still high grocery prices and high housing costs to be dealt with, but many Americans are starting to see a light at the end of the tunnel when it comes to inflation.
The Biden Administration seems to agree that it’s time to take a more positive stance on the economy. Biden’s Chief Economic Adviser, Lael Brainerd, gave a speech explaining that the Biden Administration is overseeing an American economic comeback in rural areas and depressed urban areas that have languished for the last thirty years.
“President Biden’s top economic adviser argued on Monday that the administration is engineering a revival of economically disadvantaged communities across the nation, citing patterns of new federal spending and signs of economic progress in places like Eastern Pennsylvania and Milwaukee, Wis,” The New York Times’s Jim Tankersly explains, adding that Brainerd “used a speech to the Brookings Institution in Washington to lay out a detailed blueprint of the administration’s efforts to bring jobs, investment and innovation to areas hobbled by the loss of jobs and industries.”
Not so long ago, politicians on both sides of the aisle explained that “those jobs aren’t coming back” to rural and industrial parts of the country that saw countless factories closed and wide swaths of workers laid off. Brainerd argues that the Biden Administration isbringing jobs back to these areas—and it’s improving the environment at the same time. “Ms. Brainard cited a Treasury Department analysis that finds low-emission energy investments spurred by Mr. Biden’s climate law have disproportionately boosted lower-income areas and communities that have been historically reliant on fossil fuels,” Tankersly writes.
Really, the biggest consistent drag on prices right now is housing. Nicole Friedman at the Wall Street Journalreports that existing-home sales in America last year hit a nearly three-decade low. This artificial scarcity keeps driving the prices of the few homes on the market even higher.
Probably the biggest reason why people aren’t selling their homes is the fact that the Federal Reserve drove up interest rates over the last few years, and those rate increases have driven up mortgage rates, which are still teetering near the recent high of 8%. It’s unclear why anyone who bought a home at the low mortgage rates of the past decade would choose to move to a new home with a mortgage rate that could be nearly double the rate that they previously locked in. So people are staying put, and prospective home buyers are facing the tightest home market they’ve ever seen.
(It’s worth noting that this is the exact opposite result that the Fed is seeking by raising interest rates. They raised rates with the stated intent of lowering demand, hoping that the decreased demand would lower prices. But instead, the Fed’s policy is increasing housing prices for ordinary Americans.)
Thankfully, the Fed has all but confirmed that they’re going to begin lowering rates this year, with Jeanna Smialek reporting on the most recent positive signals: “A prominent Federal Reserve official on Tuesday laid out a case for lowering interest rates methodically at some point this year as the economy comes into balance and inflation cools — although he acknowledged that the timing of those cuts remained uncertain.”
It’s not enough for our leaders to simply trust the Fed to take action, though. The central bank is so opaque (and cautious) that it could take a very long time to get mortgages back to an affordable level. I wrote at the end of last year about the policies that our leaders should enact in order to make housing more affordable for everyone, and to reprioritize the kind of housing that Americans need in the 21st century.