A series of positive economic data releases this week combined to suggest that the U.S. economy is performing exceptionally well, with stronger than expected growth, low unemployment, rising wages and falling inflation.
On Thursday, annual gross domestic product, or GDP, figures for the U.S. were released, showing that the economy grew at an annualized rate of 3.1% over the course of the year. That was followed Friday by Commerce Department data showing that the rate of consumer price increases is now at its lowest point in more than two years.
There has also been evidence that Americans' overall perception of the economy, long clouded by high inflation that drove up prices as the country exited the coronavirus pandemic, is improving.
The news has driven U.S. stock markets to record highs in recent days, but it also created a dilemma for the Federal Reserve, the U.S. central bank. The Fed rapidly raised interest rates beginning in March 2022 to wrestle inflation under control, knowing that the price of doing so might be an economic slowdown or recession.
Now, the Fed must decide whether the economy's continued strength justifies keeping rates at their currently elevated levels, despite lower inflation figures, or if it should risk reigniting inflation by starting to lower them.
Biden hails low inflation
The Commerce Department reported Friday that the rate of increase in personal consumption expenditures, or PCE — a key measure of inflation — had been 0.2% in the month of December, with the one-year rate of increase at 2.6%.
So-called Core PCE, which removes volatile food and energy prices from the measurement, was also 0.2% for the month, and was 2.9% for the year, marking the first time it has fallen below 3% since early 2021. This was particularly significant because that is the measure Fed officials prefer to consult when making decisions about interest rates.
In a statement released Friday by the White House, President Joe Biden hailed the low inflation figures and pointed out that over the second half of 2023, inflation rose at an annualized rate of 1.9%, below the Fed's long-term target rate of 2%.
"That's an important milestone that means more breathing room for working families," Biden said. "Our economy grew by more than 3% in 2023, while inflation has been at 2% in the second half of the year, and unemployment remained below 4% for a second year. This means significant progress for American workers — with wages, wealth and employment all higher than they were four years ago."
Lightning in a bottle
The performance of the economy in 2023 stands in stark contrast to predictions of stagnant or declining growth that were commonplace 12 months ago.
"The economy defied all expectations in 2023," Greg McBride, the chief financial analyst for Bankrate.com, told VOA. "At the beginning of 2023, the widespread consensus was that we were going to have a recession during the year.
“Not only did we not have the recession, but the economy grew and grew at a faster pace than it had in 2022, all the while making substantial progress on getting inflation down to more normal levels. That is like catching lightning in a bottle."
While the economy isn't completely "out of the woods" yet, McBride said, the chance of achieving what the Fed has described as a "soft landing" now appears as strong as it ever has.
Positive signal
"The GDP data yesterday and the income-expenditure data today point really strongly to an economy that is settling into a very good groove," said Josh Bivens, research director for the Economic Policy Institute, a left-leaning think tank in Washington.
"GDP growth has accelerated in recent quarters while inflation has decelerated," Bivens wrote to VOA in an email exchange. "Real [inflation-adjusted] measures of wages and disposable personal income are growing at a rising rate.
"If we manage to keep the labor market healthy with 4% unemployment or below for the coming year, I think inflation will be normal enough throughout 2024 that it could be a very good year for most U.S. families."
Bivens said he would like to see the Fed begin to cut interest rates soon, though, to prevent the economy from backsliding.
"The federal funds rates we have today are very contractionary, and this week's reports show that recent inflation is running right at the Fed's preferred 2% target, so this level of contractionary policy just isn't needed," he said.
Reasons for concern
Not all economists believe the future for the U.S. economy is necessarily so rosy.
"There are reasons for satisfaction — we've done well, so far — but I'm not optimistic about the longer run," said Desmond Lachman, a senior fellow with the American Enterprise Institute, a conservative think tank in Washington.
While conceding that the "consensus forecast was hopelessly wrong," about 2023, Lachman told VOA there are plenty of reasons for concern about the future. For example, hot wars in Ukraine and Gaza are threatening global economic stability, and actions by Houthi rebels in Yemen against commercial shipping threaten to snarl global supply chains.
Closer to home, Lachman said, he has his eye on a "slow motion train wreck" in the U.S. commercial property sector that he expects to accelerate before the end of 2024.
During the pandemic, a huge share of Americans shifted to remote working, and many remain out of the office. This means that as business leases on office space expire, many will not be renewed, leaving property developers unable to service the loans. This, in turn, Lachman said, will result in many U.S. banks suffering large losses on their commercial real estate portfolios.
"By the end of this whole story, you could get defaults on between $700 billion and $1 trillion of debt," Lachman said. "We know that for the regional banks, that's at least 20% of their portfolio."
