US economy exceeds expectations in latest quarter, boosting hopes for avoiding recession

The U.S. economy slowed in its latest quarter but performed much better than forecasters expected, boosting optimism about the nation's prospects for averting a recession.

Gross domestic product, adjusted for inflation, grew at a 3.3% annual rate over the final three months of last year, according to data from the U.S. Commerce Department.

Growth decelerated significantly from the previous quarter but still exceeded economist expectations by more than a percentage point.

The fresh data also showed that a gauge of "core" price increases -- which strips out volatile food and energy costs -- rose 1.9% in the latest quarter, putting it directly in line with the Federal Reserve's target inflation rate.

The government report reinforced optimism among many observers that the U.S. could avert an economic downturn, achieving a "soft landing" in which price increases return to normal levels while the economy continues to grow.

"Soft landing: runway acquired," Jamie Cox, managing partner at Virginia-based financial advisory firm Harris Financial Group, told ABC News in a statement.

Economic growth over the three months ending in December owed in large part to an increase in consumer spending, which accounts for roughly two-thirds of U.S. economic activity, the data showed.

Businesses, the data found, increased their spending on inventory, suggesting private-sector confidence in the outlook for returns.

Further, state and local government spending contributed to the economic expansion, including expenditures focused on infrastructure, the data showed.

"Strong growth and low inflation," Mark Zandi, chief economist at Moody's Analytics, said in a post on X. "Feels very good."

President Joe Biden touted the economic data on Thursday, describing it as "good news for American families and American workers."

The GDP data, widely viewed as the prevailing measure of a nation's economic health, comes amid a flurry of positive indicators.

Earlier this week, the Dow Jones Industrial Average closed above 38,000 for the first time ever, while the S&P 500 also reached a record high. Both indexes inched upward in early trading on Thursday in response to the GDP data.

A jobs report earlier this month, meanwhile, showed hiring in December remained robust and far surpassed expectations.

Despite strong performance on key economic measures in recent months, surveys have shown frustration among consumers that appears to contradict the data.

That dynamic began to change this month, however. A consumer survey released by the University of Michigan on Friday found that confidence soared 13% in January, reaching its highest level since July 2021.

Lydia Boussour, a senior economist at consulting firm EY, summed up the better-than expected economic performance in a statement on Thursday. "The recession that wasn't," Boussour dubbed it.

Still, Boussour added, the chances of a recession hover around 35%. The economy is expected to slow in the coming months and inflation stands above the Fed's target rate, she noted.

Inflation has fallen significantly from its peak of 9% last year but in recent months has encountered bumps in its path toward normal levels.

The Fed expects to soften its fight against inflation later this year by cutting interest rates but it remains unclear when such a move will take place.

Interest rate cuts would lower borrowing costs for consumers and businesses, potentially triggering a burst of economic activity through greater household spending and company investment.

But the Fed risks a rebound of inflation if it cuts interest rates too quickly, since stronger consumer demand could lead to an acceleration of price increases.

The stronger-than-expected growth reported on Thursday may allow the Fed to delay its rate cuts, since economic activity appears solid despite the downward pressure imposed by the central bank, Boussour said.

"The recent string of positive economic surprises means the Federal Reserve will be in no rush to cut interest rates," she added, predicting the first cut would arrive in May.