Strong GDP with good income and spending growth to end 2023. Keep it ROLLIN for 2024!

At the end of this week, we got two more pieces of data that showed the US economy finished up 2023 in a great place. The first came on Thursday.

JUST IN: The US economy grew 2.5% in 2023. That was stellar growth for a year when many experts predicted a recession. The economy grew just 1.9% in 2022.

Here’s a look at GDP by quarter:
Q4: 3.3% —> still strong due to robust consumption
Q3: 4.9
Q2: 2.1
Q1: 2.2 pic.twitter.com/8uBLA1t1rA

— Heather Long (@byHeatherLong) January 25, 2024

And if you're comparing the end of 2022 with the end of 2022, GDP growth was even stronger than that.

Did the US economy grow 2.5% or 3.1% in 2023?

A: It depends how you calculate it.

2.5% is the average change in 2023 vs average in 2022.
3.1% is the % change from Q4 2022 to Q4 2023.

The US gov reports both. Both show a 2023 boom and strong consumption. Both are inflation… pic.twitter.com/RkX2NihqvF

— Heather Long (@byHeatherLong) January 25, 2024

When broken down further, (hat tip to Econbrowser) is not only the 4 quarters of growth for 2023, but how consistent the growth is in being spread across several sectors, and the consistency of the growth in those sectors. Outside of a slowdown in consumption for Q2, only inventories and trade were factors behind changes in growth levels for 2023.

Then on Friday, we saw that not only did we get more evidence that Americans kept making money and spending more money in December, but also that inflation stayed at the low levels that we saw for most of 2023.

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🇺🇸Jolly consumers & easing #inflation in December🎄

✅Spending +0.7%
✅Inflation-adj +0.5%

💵Disposable income +0.3%
✅Inflation-adj +0.1%

🏦Savings rate 3.7% (-0.4pt)⚠️low & falling

📉PCE #inflation
👏Headline: 2.6% y/y (flat)
👏Core: 2.9% y/y (-0.3pt) pic.twitter.com/ZwlTPd8gvY

— Gregory Daco (@GregDaco) January 26, 2024

Using annual core CPI puts you way behind the curve, for 2 reasons. First, annual: even core CPI was 4.6 in the first half of 2023, 3.2 in the second half. Second, known lags in official shelter prices lagging far behind market rents 2/

— Paul Krugman (@paulkrugman) January 26, 2024

My main concern with that report would be the decline in the savings rate, down to 3.7% in December, lowest for any month in 2023. Combined with rising amounts of credit card debt and interest rates staying elevated compared to pre-COVID levels, you hope those debt payments aren't something that kicks out the legs of either income growth or consumer spending in 2024.

Combine that reality of a need to keep consumer spending going, and given that we are seeing economic growth remain strong without a corresponding rise in inflation, this is all the more reason that the Federal Reserve needs to get interest rates back down toward where they were at in 2019 (which is 3% below where they are today). And if central bankers are spooked by 3%+ growth as something that would cause prices to rise again, they're looking in the wrong direction, because it's very clear that 2021's and 2022's inflation was a combination of COVID-era supply disruptions and profiteering.

Things are in a very strong place in America's economy, with disposable incomes rising past inflation and unemployment staying low, and our policy bias should be toward keeping that going as long as possible.