Q4 GDP revised down slightly – here's what that means for interest rates
The second estimate for GDP in the fourth quarter stayed relatively the same on this weeks second reading. (iStock)
The second estimate for real gross domestic product (GDP) in the fourth quarter of 2023 was revised slightly downward, partly driven by less private inventory investment than was initially estimated, according to the Bureau of Economic Analysis (BEA).
Real GDP increased at an annual rate of 3.2% for the October-through-December period after rising 4.9% in the third quarter of 2023, according to the BEA's advance estimate released Wednesday.
The reading comes just under the BEA's original GDP estimate for the fourth quarter, which showed the economy increased at a rate of 3.3%, primarily reflecting solid consumer spending on goods and services. And it beat economic forecasts that anticipated a deceleration of growth over the previous month with the expectation that the economy would expand by a 2% rate.
The stronger-than-expected growth pushes the timeline for when the Federal Reserve will begin to cut interest rates further into the distance. Fed officials have predicted at least three rate cuts this year, with interest rates expected to tick down to 4.6%, according to the central bank's updated economic forecasts in its Summary of Economic Projections (SEP).
However, January's hotter-than-expected inflation reading and solid economic data give the Fed more room to wait.
"The GDP numbers confirm the resilience of the nation's economy, which signals the Federal Reserve will be more reluctant to lower interest rates later this year," A&D Mortgage CEO Max Slyusarchuk said.
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Housing needs rates to drop
For the housing market, the longer timeline for interest rate cuts will likely keep mortgage rates from declining much during the year's first half. December saw rates drop from nearly 8% to the mid-6% range, where they remained until rising to almost 7% at the end of February.
A reversal in interest rates is crucial in creating more affordability for buyers also dealing with record home price gains. Home prices hit a record high in December, rising 5.5% above the previous year's gain.
Fannie Mae predicts that mortgage rates will drop below 6% by the end of 2024 as the Fed dials back interest rates. A longer timeline for these cuts would delay this. Homebuyers on the sidelines that are waiting for a meaningful change in rates before they buy, shouldn't, Slyusarchuk said.
"This means that homeownership will not get more affordable in the near future," Slyusarchuk said. "So, for those who can find a home, homeownership remains a strong investment, and there is no benefit to holding off making an offer, as housing fundamentals won't change greatly this year."
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Upside risk to inflation
Inflation increased 3.1% in January, less than the 3.4% growth last month but above the sub-3% growth economists had expected. While inflation has been "moving in the right direction," ongoing wars, supply chain disruptions, and banking sector uncertainties could reverse the progress toward achieving and maintaining the Federal Reserve's 2% target, according to Freddie Mac.
"These factors may lead to a 'higher for longer' rate environment," Freddie Mac said.
Moreover, strong consumer demand adds to the upside risk to inflation as Americans get used to paying more for goods and services and are less determined to resist price increases, according to a Morning Consult report.
"Fewer consumers report surprise over prices, corresponding with less price sensitivity and trading down compared with a year ago," the report said. "Improving purchasing power is helping to boost demand for everything from restaurant purchases to homes and autos."
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