The economy keeps humming along in the face of severe headwinds, most notably the highest interest rates in a generation. Key parts, especially public and private investments in buildings such as manufacturing plants, lay the foundation for faster economic growth and technological advances over the longer term. These added investments follow in part from a range of legislative achievements aimed at rebuilding the country’s infrastructure and boosting the generation and adaptation of renewable energy.
The Bureau of Economic Analysis reported that the U.S. economy grew by an annualized inflation-adjusted rate of 3.3% in the last three months of 2023, down from an unusually high 4.9% in the third quarter. All parts of the economy contributed to this growth, highlighting broad based momentum of an increasingly competitive economy. Growth followed in part from strong public and private investments. And, data on exports show that the economy is already highly competitive and could become even more competitive in the near term as a result of those investments.
Stable consumer spending as the bedrock of a resilient economy
Consumer spending always makes up the bulk of economic activity. More interesting is what people are spending their money on. At the end of 2023, spending on durable goods such as recreational vehicles and equipment and household appliances was particularly strong. It expanded by an annualized rate of 4.6% at the end of 2023. Recreational goods and vehicles – think skis and snowmobiles – grew by an 11.0% at the end of 2023 after a very strong surge of 17.0% in the third quarter. In a similar vein, spending on recreation services such as gym memberships grew by 5.6% and going out to restaurants as well as hotel stays increased by 7.6% at that time. A lot of the substantial spending increases happened in areas that are likely not necessities. People have stable jobs, they are earning more, their wage increases outpace inflation and they act as if the economy is doing well for them.
This is also reflected in the importance of the three categories – recreational vehicles, recreation services and restaurants and accommodations – to the overall growth of consumption at the end of last year. Consumer spending grew at an annualized inflation adjusted rate of 2.8%. More than 40% of this growth came from these categories.
One possible explanation is that people felt good about the economy, in part because the stock market boomed, and dipped into their savings to pay for goods and services. After all, the personal saving rate – the share of after-tax income that was saved – dipped to 4.0% from 4.2% in the third quarter. That is, the so-called wealth effect – higher spending as a result of unexpected gains to household wealth – drove some part of total consumer spending.
Exports outpace imports amid global headwinds as a sign of U.S. competitiveness
International trade was another important contributor to economic growth, highlighting the U.S. economy’s competitive position. Exports grew at an annual inflation rate of 6.3%, far outpacing imports, which grew at 1.9% at the same time. Exports contributed 0.65 percentage points to the overall growth rate of 3.3%, or 19.7% in relative terms, while imports reduced growth by 0.25 percentage points. Food, feeds, and beverages (+38.3%), petroleum and petroleum products (+47.3%), civilian aircraft, engines and parts (+21.5%) and transport (+27.8%)– such as overseas shipping — were the fastest-growing exports at the end of 2023. On the other side, computers and peripherals (+58.2%) and travel for all purposes (+43.3%) were the fastest-growing imports.
The increase in exports is especially noteworthy since the dollar has been fairly strong against its trading partner currencies for some time, which makes it more expensive for foreigners to buy and good services from U.S. companies. Moreover, economic growth in Europe and China as well as other parts of the world slowed and thus could have dampened demand for U.S. products. Still, exports boomed. Put differently, many U.S. goods and services are highly competitive, even under adverse circumstances.
Public Investments Rebuild Infrastructure as Foundation for Faster Future Growth
Government spending at all levels – federal, state and local – grew at an average rate, largely because of increases in investment spending. Total government spending increased by 3.3% in the fourth quarter of 2023. This was down from 5.8% in the second quarter, but the same as in the second quarter of 2023.
More important for future growth is the fact that spending on government investment spending was especially strong. Investment spending for buildings (+16.5%), equipment such as school buses and computers (+8,8%) and intellectual property such as new educational software (+6.0%) outpaced government consumption spending (+0.7%). In relative terms, investments by state and local governments in structures such as schools and transit stations were the largest contributors, making up more than a quarter of the total growth of government spending at the end of 2023. This type of government spending accounted for similar or larger shares of overall government spending growth since the middle of 2022. That is, state and local governments invested heavily in infrastructure for more than a year, laying the groundwork for faster long-term growth.
Private Business Investment Continues to Grow Manufacturing Capacity
Business investment – officially called nonresidential fixed investment – grew at a fairly modest rate. It increased at an annual rate of 2.1% in the third quarter, after growing by 10.0% in the prior quarter.
The growth in spending on private industry structures was led by manufacturing structures. This continues a boom that really took off at the end of 2022.
In comparison, residential fixed investment spending – new houses and renovations – grew at a meager rate. It increased by 1.1% at the end of 2023, after growing by 6.7% in the third quarter and declining for almost two years in a row. The Federal Reserve’s interest rate increases have not resulted in a recession or rising unemployment, but it likely slowed housing investment, exacerbating the lack of affordable housing.
The U.S. economy has proven to be remarkably resilient. Consumer spending is still very strong in the face of higher interest rates, boosted by higher inflation-adjusted incomes and stock market gains. More importantly, public and private investments focus on longer-term infrastructures such as new manufacturing plants. Those investments have the potential for workers and businesses to become more innovative over the long term. This is remarkable, given that U.S. businesses are already globally relatively competitive with export growth outpacing import growth.
Past Legislative Efforts Underpin Boom in Public and Private Investments
These investments by state and local governments and manufacturing businesses go along with focused policy initiatives. The bipartisan Infrastructure Investment Jobs Act, the Inflation Reduction Act and the CHIPS Act all provided more public support for public and private investments and created more planning certainty for private investments. Greater planning certainty, especially in the areas of renewable energy generation and use translate into more private investments in those areas as well. The result is a resilient and innovative economy that could have substantial momentum going forward.
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