Finance
Final fourth quarter GDP revised upwards as consumer spending rises
An uptick in consumer spending helped boost U.S. economic growth in the fourth quarter. (iStock)
The third and final estimate for real gross domestic product (GDP) in the fourth quarter of 2023 was revised upwards, showing that the U.S. economy grew at an annual rate of 3.4%, according to the Bureau of Economic Analysis (BEA).
The reading comes just above the BEA’s second GDP estimate for the fourth quarter, which showed the economy increased at 3.2%. The change primarily reflects upward revisions to consumer spending and nonresidential fixed investment.
Real GDP increased at an annual rate of 3.4% for the October-through-December period after rising 4.9% in the third quarter of 2023. Thursday’s final 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% and 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.
Economic growth is a crucial metric the Federal Reserve is monitoring as it weighs when it will begin dialing back interest rates. 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). Market expectations are that the first rate cut will come in the summer, if not later in the year.
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High rates weigh on consumer wallets
The Fed’s decision to keep interest rates higher for longer puts a strain on consumer wallets and how much they pay to borrow, according to Michele Raneri, the vice president of U.S. research and consulting at TransUnion.
According to a recent TransUnion report, credit card balances surged past the $1 trillion mark for the first time in the fourth quarter of 2023. While Americans charged on their cards, they also increased their unsecured personal loan balances in the fourth quarter. Personal origination balances topped $245 billion, compared to $222 billion the previous year.
“While inflation continues to trend towards more normal levels, today’s decision from the Fed is to hold interest rates at their current levels and that any potential decreases will take place later in 2024,” Raneri said. “This means U.S. consumers who continue to face relatively high-interest rates across a range of credit products will have to wait at least a bit longer for rate relief. When rates do begin falling, the effects throughout the credit industry will be real but will likely be slow to take root.”
Consumers can explore refinancing any high-interest debt into lower-interest credit products to reduce balances once interest rates are brought down, according to Raneri.
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Consumer optimism improving
Despite the economic challenges, consumer confidence hit a record high in March. The University of Michigan’s benchmark Consumer Sentiment Index rose 3.3% in March to a final reading of 79.4, the highest since July 2021, the University of Michigan said in a report.
The number reflects the improved consumer outlook that inflation will continue to soften and that personal finances will also be lifted as the effects of high prices and expenses on living standards ease, the report said.
Consumers may be more optimistic, but the index remains far from its pre-pandemic highs, reflecting the long shadow of high inflation, according to Jim Baird, Plante Moran Financial Advisors’ chief investment officer.
“Consumers are far from ebullient in their assessment of the current state of the economy, their personal financial prospects, and the outlook for the economy further down the path,” Baird said. “The fact that consumer sentiment remains constrained against the backdrop of a robust labor economy, strong wage growth, and above-trend economic growth is a direct reflection of the corrosive effects of surging inflation in recent years.
“Paychecks may have experienced a nice boost in recent years, but when those additional dollars are going right back out the door to cover the rising cost of rent, food, gasoline, personal services, and a host of other expenditures, it’s no surprise that consumers aren’t more upbeat,” Baird continued.
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It appears T. Rowe Price is benefitting from the record growth in actively managed exchange traded funds.
Tim Coyne, the firm’s head of ETFs, reports the firm is seeing significant growth in the area — listing the T. Rowe Price Capital Appreciation Equity ETF (TCAF) and T. Rowe Price U.S. Equity Research ETF (TSPA) as two established strategies that can satisfy investor demand.
“I think having that professionally managed portfolio is really beneficial to clients,” Coyne told CNBC’s “ETF Edge” this week. “We’re seeing just… greater volatility [and] uncertainty across both the equity and fixed income markets.“
According to Coyne, the T. Rowe Price Capital Appreciation Equity ETF suits investors who are looking for long-term growth.
“The objective of the fund is to outperform the S&P 500 with lower volatility and greater tax efficiency,” he said. “It’s also a more concentrated portfolio, typically holding around a hundred names.”
As of April 24, the fund’s top holdings include Microsoft, Amazon, and Apple according to the T. Rowe Price website. But it’s not all Big Tech. The ETF also features smaller positions in companies like Becton Dickinson and Roper Technologies.
The T. Rowe Price Capital Appreciation Equity ETF is down about 5% so far this year while the S&P 500 is off about 7% However, the ETF is up close to 8% over the past year — roughly identical to the S&P 500’s performance.
Coyne notes the T. Rowe Price U.S. Equity Research ETF follows a similar strategy, but with a heavier weighting in top tech stocks.
“This is more of a large-cap growth product [T Rowe Price U.S. Equity Research ETF],” he said. “There are components of characteristics of both passive and active here. This fund is actually managed by our North American directors of research. So again, strong fundamental research is going into the stock selection.”
Both the T. Rowe Price U.S. Equity Research ETF and S&P 500 are down around 7% since the beginning of the year. Meanwhile, the fund is up almost 9% over the past year. That’s less than one percent better than the S&P 500’s performance.
T. Rowe Price U.S. Equity Research ETF vs. S&P 500
‘Some form of bear market’
Strategas Securities’ Todd Sohn thinks investment demand for active managers will continue to be strong.
“This is the type of the environment where it [active management] can actually shine,” the firm’s senior ETF and technical strategist said. “We are in some form of bear market. This is where the active manager really can come into hand and offer their solution they are doing right.”
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