Economists expected a recession, but got strong growth. Here's what they missed. - MarketWatch
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Last Updated: Jan. 27, 2024 at 10:35 a.m. ET First Published: Jan. 26, 2024 at 6:00 a.m. ET By
Hannah Erin Lang
Stronger than expected fourth-quarter GDP numbers were 'the last nail in the coffin' for economic pessimists
A resilient labor market is among the factors fueling the U.S. economy's continued growth, even as many economists predicted a recession.
In 2022, Michael Walden guessed there was about a two-in-three chance that the U.S. economy would slip into a recession in the next year or so.
Now, the Raleigh, N.C.-based economist, like many others, is having to admit he was wrong.
"Clearly, that didn't happen," he said.
The U.S. economy grew at a robust 3.3% annual pace in the fourth quarter, well above the 2% expected by economists. That put the overall growth rate at 3.1% for the full year.
The report was "the last nail in that coffin" for anyone expecting an imminent downturn, Walden said, defying earlier recession fears that now seem to have underestimated the economy's resilience even in the face of sharp interest-rate increases.
But how, exactly, has the economy avoided a slowdown that so many once considered a given? Here are a few factors that experts admit they didn't see coming.
American consumers just won't stop spending
The surprising growth of the economy can be traced right back to the seemingly bottomless pocketbook of the American consumer, economists told MarketWatch.
Households spent the cash reserves they built up during the pandemic. They dipped into their savings, and opted for smaller rainy day funds. They turned to debt, racking up bigger credit-card balances or utilizing buy now, pay later services at record levels during the holiday-shopping season.
It's hard to say what, precisely, is driving Americans' tireless spending streak, economists say.
Maybe the pandemic — and its slew of canceled concerts, delayed vacations and widespread shutdowns — spurred consumers to spend more of their money in the present. Maybe the financial scars of the Great Recession have faded, and households have fewer qualms about going into debt.
Whatever the reason, the data is clear: Americans are saving less and spending more.
"What we are seeing is that consumers are getting back to their usual 'spend now, ask questions later' mode," said Beth Ann Bovino, chief economist at U.S. Bank.
There's an old adage in economics to never bet against the U.S. consumer. It seems that over the last few years, according to Walden, many economists — himself included - failed to heed that warning.
"That's how I characterize my mistake," Walden said. "I underestimated the American consumer, their desire to spend and their willingness to borrow to keep spending."
The labor market has stayed strong
The labor market has also proven more resilient than expected, economists said, helping to prop up the American spending machine.
Despite high-profile layoffs in the headlines, the unemployment rate stayed below 4% all year long. And new weekly jobless claims are still hovering at remarkably low levels.
In 2023, wage growth also started outpacing inflation after months of aggressive price increases.
"As long as the labor market remains okay, consumers have money to spend. It's as simple as that," said Brett Ryan, senior U.S. economist at Deutsche Bank.
Is a recession coming in 2024?
Just because consumers kept spending through 2023 doesn't guarantee that will be sustainable through this year, economists said.
"Eventually though, and I think this year may be a telling year, that will start to run out and households will become a bit more mindful — trading down, searching for value — than they have in the past two years," Bovino said.
Americans' carefree accumulation of debt has also raised some alarm among experts.
Total consumer credit rose $23.7 billion in November, the Federal Reserve said, marking the biggest gain in a year. That put consumers' total outstanding credit, a measure of how much money people have borrowed, above $5 trillion for the first time ever.
And the total debt that Americans owe on their credit cards also reached record highs in 2023.
Does that mean there's still a chance of a slowdown ahead?
"I've sort of dismissed the idea of an [official] recession," Walden said. Instead, he's expecting what he calls a "bumpy" period that stops short of a broader slowdown.
Ryan still anticipates a mild recession in the first half of this year, he said, though "obviously, it's looking less likely as the year goes on."
Why has the course of the economy been so tricky to predict? Partially because few economists have seen anything like it, Ryan noted.
"It's been a weird cycle that has seen a lot of things we've never seen before, due to the pandemic," he said. "It seems like people are still trying to find that new equilibrium."
Greg Robb contributed reporting.
About the Author
Hannah Erin Lang
Hannah Erin Lang is a personal finance reporter for MarketWatch, based in New York. Previously, she covered banking and finance for The Charlotte Observer in her home state of North Carolina. She graduated from UNC-Chapel Hill with a degree in business journalism and grew up in the same town as her alma mater.
Agreed. The economy is better for some, but for a lot of others they don't feel so good when they come out of a grocery store where they see prices continuing to climb faster than they can keep up with it. I said it months ago (and many others have said the same thing over the years) that most voters are interested in kitchen table issues. If you don't have a lot of money in the stock market it's hard to give that a lot of thought and praise when you have to put food on the table, keep a roof over your head, put gas in the car and just maybe have a vacation this summer.
Sorry you are doing so poorly...
Take your false pity somewhere else, I'm doing ok. But I know a lot of people who are not. You keep crowing about how good things are but I suspect this November will tell a different story. Bidenomics keeps missing the mark because so many lower and middle class families cannot keep up with the price hikes for everyday products. We hear stories every week about how the amount of credit card debt has reached record levels. There is a high volume of households that cannot afford emergency bills. Even VP Harris likes to state that the average American is a $400 emergency bill away from bankruptcy. (yeah, that's not true either)
While the actual numbers are not as bad as the administration likes to try to say, they are not great either. How many of those 13% of households will put their problems on Biden and this administration come November? This time around Biden must run on his record and right or wrong the President gets the blame for a bad economy. We shall see in November how that impacts his botton line.
And that's a Paul Harvey moment.
First, to ensure you understand the point I am making, my point is:
Further, my position is that a PotUS has very little control over an economy. A PotUS can screw up an economy, but significantly improving an economy is NOT something that is within the powers of the presidency. The Fed has the most power here and their power is crude and has a long period of cause and effect.
You can nit-pick on the numbers and show that interest rates, for example, are still too high. But taken as a whole, our economy is in good shape, is still recovering, and eventually this will be recognized by the electorate.
There is, thus, a reasonable chance that the economy will NOT be a negative for Biden by November. The big policy negative for Biden will be the border.
I agree with your point. I agree that the President has little control over the economy, but all Presidents are right up there in trying to take credit when the economy is good and also Presidents get the blame when the economy is bad. Right or wrong doesn't come into play here because we're talking about people's feelings. When someone cannot afford rent because rent goes up faster than their paycheck they naturally will blame someone for their issues and the President is a likely target.
Didn't think I was nit-picking on numbers. I agree that overall the economy is in fairly good shape, especially for those who have any money in the stock market. The problem is there are still a lot of people who are in financially bad shape and a lot of people don't like to blame themselves for their situation so they look for someone else to blame. We won't really know until November but I suspect that the economy will be a negative for Biden. According to Pew Research, the economy is still the number 1 issue for the public.
I agree that the border and immigration will also be a big issue for November, but I think it hits both parties. Neither party has bothered to do any real work on fixing this issue because I believe they would rather keep it as something they can use to hammer the other side with. But I agree with you that I think this will hit Biden harder than the GOP side due to the record numbers at the borders during this Administration.
Correct. That is why Biden is blamed for the economy and why it matters for the electorate to realize the state of the economy by election time.
Yes, and those people will blame the current PotUS not matter what. We seem to have plenty of irrational people in the electorate.
It is a negative for Biden and a positive for Trump. There is indeed no excusing either party for our immigration policies since this has been going on for decades. So yes on blaming both, but I was speaking of presidential politics.
In all we seem to agree.
Now, the big question is the degree to which the electorate is informed and engaging in rational thinking this November. I have given up the current GOP as a lost cause. I still hold out hope for the electorate in general.
I gave up hope in the general electorate a long time ago. When current research shows that a good 80% of teens vote for the party their parents vote for, the sheep are in charge.
Add in the further divide we see between the extremists vs the moderates and the left from the right and it's easy to see why Trump and Biden have such support from their core. It's a sad state of affairs and I don't see it getting better in my lifetime.
I agree.
Yeah, but eggs were really expensive for a minute so Bidenomics is a disaster!
gee, wasn't there a story in the news recently about egg producers price fixing or having to pay huge federal fines for something?
Economics is probably less of a science than Vodoo.
Think "new economy" with "Tech Bubble" or "Mortgage"
People, in general, just never learn. They see the advertisements of the shiny new thing-a-me and have to rush out to buy one, no matter that they have $50k in an auto loan and $45k in student debt. Whoops! Wanted to buy a house? (snicker) Not on your income. Oh, sorry, you can't even afford to rent.
Humans' relationship with money is fundamentally flawed by the trust that they put in the capitalist system.
Exactly, all you have look at the success in communist countries to see that.
Yes and Socialist State success stories like Venezuela …..
Or, Norway and Sweden...
What communist countries? There have not been any to my knowledge. Yes, there have been countries that we called communist, but they were autocratic in structure and their economies were command economies, largely. China calls itself "communist" but it is an admixture of command economics and capitalist-themed companies, as is Russia. They seem to be doing ok.
There is no way to be truly equitable with either type of economy. Command economies don't function efficiently (or at least haven't in the past) because of their top-down approach to both production and distribution leading to areas of abundance and areas of want. Capitalism does not do much better because its driving force is the "maximization of profit" which leads to areas of oversupply and areas of limited supply. Imagine that.
China, Cuba, Laos, Vietnam, and North Korea.
What was the major driver that over the last two centuries pulled most of the world’s people out of extreme poverty? What typically drives innovation? Does competition and capital accumulation incentivize businesses to improve efficiency?
The best example out there is North v South Korea.
One very successful, one a shithole.
Capitalism v Communism
Ah yes, you fancy Nordic success. Some of these least diverse countries around.
Interesting ….
Sweden is 98% white, Norway is whiter and the government doesn’t quantify racial numbers.
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The lack of diversity usually shuts up the Democratic Socialism cheerleaders
Sometimes not but this is NTers where all facts are pliable.
Social programs.
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First off, no. Planned economies are not communism. Secondly, I will repeat myself: There is no way to be truly equitable with either type of economy. One would think that I am arguing for or against either system, but that is not my intention. I would argue against the people claiming that either system is "the only way." Neither is.
Define poverty. We have medical poverty (the inability to pay for and thus the inability to receive health care) right here in the USA. How is that a good thing?
Read what I wrote: Humans' relationship with money is fundamentally flawed by the trust that they put in the capitalist system.
The capitalist system today is understood to rely on one axiom: Maximize Profit. Not "make a profit", Maximize Profit. I heard it during a discussion this morning about artificial intelligence on the BBC. This gentleman was talking about a company's "duty" to maximize profitability for the shareholders. Pardon my imagination while I envision a hoard of Scrooges running around "maximizing profits."
Humans' relationship with money is fundamentally flawed. It, money, has morphed into the end-all and be-all of society. It is not something with which to measure moral character, yet Donald Trump is walking around grabbing women by their pussies because, "When you're rich, you can do that." He has evangelical voters lining up to vote for him. Why? Because he was rich enough to impose himself on the public, and they thought that the ends justified the means.
"People, in general, just never learn."
Sounds like you learned from experience, the hard way
Our economy is based on people continually buying things they don't need and then discarding it and continuing the cycle. Our brains are wired to get pleasure from buying and buying and buying. It is an addiction like overeating and drugs.
That is why so many are renting buildings for storing merchandise they don't use, building mountains of merchandise we discarded on land and islands of plastic trash in the oceans.
How much of that GDP growth is due to federal spending? That spending also raises the GDP and how much of this was on borrowed money? The federal deficit was $1.7 trillion in 2023 and is projected to be another $1.7 trillion in 2024. There's so much being spent on the federal credit card. How much longer before the federal government can no longer borrow money?
The Bipartisan Build Back Better infrastructure bill has stimulated the economy and run up the deficit, but not as much as gop tax cuts have...
Name President who did not have expensive economic stimulus programs. I am waiting...
Why are you deflecting in your own seed?
Yeah, that’s why we have money earmarked for COVID building roads and fire houses. Great projects, using unearmarked money. Where does it end?
It doesn’t, taxpayers are misrepresented and get screwed.
Is our economy booming, or not? Huh?
Is the US leading The World post-Covid?
Does wage growth now exceed inflation?
Is unemployment nearly nonexistentant?
If no, where in hell are you posting from?
Booming? Huh? I don’t think so. Not really. Most of the gains are simply getting us closer to pre COVID numbers. Only three years later. Wow! What a boom.
Nothing new. The US economy leads the world often.
Not against real inflation. Barring any further setbacks that isn’t suppose to happen until the fourth quarter this year. If then. Everyone is feeling the bite. Some just refuse to admit it.
And yet, businesses still have problems replacing pre COVID jobs. Across the board. That unemployment number is clearly being cooked.
I’m posting from reality. Not from crackpotted partisan land.