2023 GDP Growth 2.5%

Update 750 —2023 GDP Growth of 2.5%
Shows Post-Pandemic Economy Strong

With continuing labor market resilience, records in major equity markets indices, and a report this week showing surprisingly strong GDP growth, talk is almost nil of the recession that many thought inevitable a year ago. The strong gains in GDP over the past four quarters belie an across-the-board economic strength and challenge persistent but slowly yielding popular perceptions about the economy.

Though this week the House was in recess, plans are set for a floor vote next week on the tax package that cleared Ways and Means in a 40-3 vote last Friday. But in the Senate, the entire emergency supplement request made by President Biden months ago looks imperiled by the politics of the border, with Donald Trump making clear he’d rather run on this issue than see Congress resolve it. We cover the above and Biden’s student loan forgiveness plans announced last week below.

Good weekends, all…




Economic data on growth and inflation released this week strengthen the case that a soft landing — a recession-less but so far successful Federal Reserve fight against inflation — has indeed been achieved — an accomplishment that eluded the shrinking European Union economy. The lag effects of the Fed’s 2022-23 rate hikes remain the biggest risk to tipping the economy into a recession. Treasury Secretary Janet Yellen cited the new economic data in remarks yesterday in which she said “it’s been the fairest recovery on record.”

The new data is a positive sign for the Fed ahead of the next Federal Open Market Committee (FOMC) meeting next Tuesday and Wednesday, at which the Fed is expected to hold the federal funds rate steady, at the 5.0 to 5.25 range, for yet a fourth consecutive time.  

GDP Grew by 3.3% Last Quarter, Beating Expectations 

Real gross domestic product (GDP) increased by 3.3 percent at an annualized rate in the fourth quarter of 2023, far exceeding forecasters’ expectations, according to the advance estimate released by the Department of Commerce’s Bureau of Economic Analysis yesterday morning. 

Though down from the 4.9 percent increase in real GDP in the third quarter of 2023, GDP grew by 2.5 percent overall in 2023, a robust gain from 2022’s increase of 1.9 percent 

Source: Council of Economic Advisors

Last quarter’s GDP growth was primarily driven by an increase in consumer spending, which added 1.9 percentage points to real GDP growth in the fourth quarter of 2023. Consumer spending on both goods and services rose over the quarter, with consumers mainly spending in several categories of services – health care and food services and accommodations – and on two categories of goods – recreational goods and vehicles, led by computer software, and nondurable goods, led by pharmaceutical products. The resilience of the labor market has continued to support strong consumer spending. 

Exports of goods and services added 0.7 percentage points to real GDP growth last quarter. The export of goods last quarter, led by the export of petroleum — domestic oil production has surged to record levels — while the export of services was led by the export of financial services. 

Imports, which are a subtraction in the calculation of GDP, subtracted 0.3 percent from GDP last quarter. 

The second estimate for the fourth quarter will be released on February 28, with the third estimate for the fourth quarter to be released on March 28. 

Inflation Showed Continued Steady Decline in December 

The personal consumption expenditures (PCE) price index – the Fed’s preferred measure of inflation – continued to cool last month.

Core PCE, which excludes food and energy prices, rose by 0.2 in December, slightly higher than the monthly increases of 0.1 percent in the two months prior. Core PCE increased by 2.9 percent on an annualized basis, down significantly from the highs of over 5 percent reached during 2022. 

Headline PCE also rose by 0.2 percent in December, rising by 2.6 percent on a year-on-year basis on par with the 2.6 percent annualized increase in annualized headline PCE in November. 

Source: Council of Economic Advisors

The increase in PCE in December reflected an increase in spending on both goods and services. Within goods, the largest contributors to the increase were motor vehicles and parts, led by new light trucks. Over the month, food prices increased by 0.1 percent while energy prices increased by 0.3 percent. 

With both headline and core PCE trending below three percent on an annualized basis, approaching the Fed’s target rate of two percent, inflation has significantly fallen from its peak in 2022. 

Other Developments

GOP Splintering on the Border Deal

Optimism that a border deal could hit the floor as early as this week quickly faded as Punchbowl News reporting on Wednesday revealed that Senate Minority Leader Mitch McConnell is casting doubt on the deal, which could unlock vital aid to Ukraine, Israel, and Taiwan. The negotiations already hit substantial stumbling blocks on parole provisions last week but have been further complicated after former President Donald Trump expressed his disapproval of any border deal, as immigration is likely to be a central component of his 2024 presidential campaign.

The rest of the $111 billion National Security Package faces a questionable fate. Senator McConnell had long been a staunch supporter of Ukraine aid. But his change of tune this week may send a worrying signal to American allies that aid may not be coming their way anytime soon. On the domestic front, the National Security Package would refill vital stockpiles in the American defense base. 

Senate negotiators Chris Murphy (D-CT), James Lankford (R-OK), and Kristen Sinema (I-AZ) will continue to push for a bipartisan agreement upon the Senate’s return to the Capitol on Tuesday. It is unclear if or when text for the long-awaited border deal will be finalized and circulated. 

Tax Package Slated for House Vote Next Week

The House of Representatives was given notice on Tuesday night that the Tax Relief for American Families and Workers Act may see floor action next week. The tax package, which advanced out of the House Ways and Means Committee late last week in a 40-3 vote, pairs an expansion of the Child Tax Credit (CTC) with business-friendly provisions. 

The business tax provisions would reinstate the 100 percent bonus depreciation deduction as well as delay the R&D amortization requirement and interest expensing limits. The roughly $33 billion cost of the business provisions would be in parity with the cost of expanding the CTC, which would primarily benefit low-income families. An additional $13 billion would be provided in an extension of the Low Income Housing Tax Credit (LIHTC), tax relief for disaster victims, and a special carve-out agreement with Taiwan.

The bill is likely to be brought to the House floor under suspension of the rules, requiring a two-thirds majority vote, as early as Tuesday of next week. But some Republicans are already upset that the bill did not include a repeal of the TCJA’s $10,000 SALT cap, which limits deductions for state and local taxes. These members, led by Representative Nick LaLota (R-NY), are encouraging House leadership to move the tax package under normal order, as passing legislation under suspension of the rules prevents amendments from being proposed and debated. 

Senator Thom Tillis (R-NC) has spoken out against the use of the Employee Retention Tax Credit to offset the cost of the tax package, stating “The employee retention credit was implemented in the CARES Act and did not have a pay-for, so that’s a fake pay-for in my opinion.” Traditional Republican concerns about expanded assistance for low-income individuals and families through the CTC and LIHTC have also been shared by Senator Tillis and Ranking Member of the Senate Finance Committee Mike Crapo (R-ID).  

The bipartisan agreement to include business provisions should bring a majority of the package’s Republicans on board, but questions remain about its path to passage. The odds are still against it without a legislature vehicle, but the legislation could move as a rare free-standing tax bill. More likely, members will target appropriations legislation under the first CR deadline on March 1 as a legislative vehicle. 

Biden Announces $5 Billion in Added Student Loan Relief

On January 19, the Biden administration announced that it had approved $4.9 billion in student loan relief for 73,600 borrowers. This brought the Biden administration’s total student loan relief to $136.6 billion for more than 3.7 million borrowers. The debt relief was provided to borrowers who fell into one of two categories:

  • $1.7 billion for 29,700 borrowers on income-driven repayment (IDR) plans. This brought the Biden administration’s total relief for IDR plans to $45.7 billion for 930,500 borrowers.
  • $3.2 billion for 43,900 borrowers through the Public Service Loan Forgiveness program, a forgiveness program that benefits employees in public service jobs. Total relief provided by PSFL now totals $56.7 billion for 793,400 borrowers since October 2021.

This latest round of student loan forgiveness comes only a week after the Biden administration had announced additional relief for borrowers using the Saving on a Valuable Education (SAVE) Plan. As the 2024 election approaches, expect President Biden to continue pushing for additional student loan relief to fulfill a key campaign promise, one that disproportionately concerns young voters.

Look Ahead

Tuesday, January 30

  • January FOMC meeting (Day 1)

Wednesday, January 31