WASHINGTON - U.S. economic growth accelerated in 2013, with activity picking up significantly during the latter half of the year. Over the four quarters of 2013, real GDP advanced 2.7 percent, notably faster than the 2.0 percent pace in 2012.
Private-sector growth and job creation continued to sustain the recovery amid ongoing fiscal retrenchment; since the recovery began in the second quarter of 2009, real GDP has grown at an average 2.4 percent annual rate, and private domestic final demand has grown at a 2.7 percent rate. The private sector has created nearly 8.2 million payroll jobs over the past 46 months, recouping almost all of the private-sector jobs lost during and after the Great Recession. Overall, the unemployment rate has declined by 3.3 percentage points and currently stands at 6.7 percent, the lowest unemployment rate since October 2008. There continue to be solid improvements in the housing sector, in the manufacturing sector, and in household and business balance sheets. This private sector-led, self-sustaining recovery has driven the economy while the federal budget deficit as a percentage of GDP has been reduced to less than half its level in 2009. Since the end of the Great Recession, we have seen substantial economic recovery, and yet the economy is still below full employment, so more work remains.
The advance data on GDP growth for the final quarter of 2013 showed that, despite the government shutdown and some private predictions of sharply slower growth in Q4, real GDP advanced at a solid 3.2 percent pace, albeit somewhat slower than the robust 4.1 percent increase in the third quarter. An acceleration in real consumer spending and business investment in equipment drove growth, along with a substantial narrowing of the trade deficit. In addition, state and local government spending rose for the third straight quarter, following 3½ years of nearly continuous decline, and private inventory investment also contributed to growth, though to a much lesser extent than the large build in inventories seen in the third quarter. Business outlays for intellectual property products also grew solidly in the final quarter, though more slowly than in the third quarter. Partially offsetting this strength was a decline in residential investment that likely in part reflects the rise in mortgage interest rates over the year, and a sharp decline in federal government spending that was the result of both the government shutdown and continued fiscal consolidation. Overall, the year ended on a strong note, leaving the economy poised for even faster growth this year.
Over the course of 2013, businesses continued to add to payrolls, bringing total private-sector job creation to 2.2 million for the year. In the fourth quarter, total nonfarm payrolls advanced by an average 172,000 per month, a faster pace than in the third quarter, despite a softer payroll reading in December. The unemployment rate declined sharply in 2013, from 7.9 percent to 6.7 percent, reaching a low not seen for more than five years. The employment report for January 2014 is due at the end of this week.
The improvement in housing market conditions over the past few years continues, although activity moderated in the second half of 2013, partly reflecting the rise in mortgage interest rates over the year. Even so, total housing starts reached a six-year high last November, new home sales climbed to a five-year high in 2013, and total existing home sales had the best year since 2006. Home prices have increased rapidly over the past year from the low level seen in the wake of the housing bust, and the rise in home prices has helped push many homeowners out of a negative equity position. The proportion of mortgages that are still underwater has been cut almost in half, from a peak of 25 percent at the end of 2011 to about 13 percent. And although mortgage interest rates have risen, on net, over the past several months, they remain quite low by historical standards, and housing demand has remained healthy despite the rise. As a result, with housing affordability still well above its long-term average, job growth continuing, the economy growing, and the prospect for household formation to rebound to its historical level, the outlook for the housing sector appears favorable.
Headline consumer price inflation has been low. During 2013, the consumer price index (CPI) rose by 1.5 percent, decelerating from its 1.7 percent year-earlier pace. Some of this slowing reflects lower energy prices, but core consumer prices—that is, without the volatile food and energy components—rose by 1.7 percent in the twelve months through December, less than the 1.9 percent pace in the previous twelve-month period. Even though some of the influences damping inflation may be idiosyncratic, the slowing reflects a wide variety of factors, from lower commodity prices to slowing health care costs.
Real GDP grew much faster than had been expected during 2013, largely because of the sharp acceleration during the second half of the year to 3.7 percent, from 1.8 percent during the first half. The U.S. economy appears poised to see higher growth during 2014 than 2013. Despite tentative prospects for global growth, we are guardedly optimistic that the economy’s performance has now reached an inflection point, and we expect faster growth in coming years as well. While we welcome the acceleration in growth, we also want to see a faster pace of hiring in order to bring the economy back to full employment.
As part of this outlook, certain domestic headwinds to growth seem to have receded. The bipartisan budget agreement reached in January will fund the government through the end of the current fiscal year. This resolution removes uncertainty about the government’s ability to support the economy and provide needed services, and the agreement itself features somewhat less fiscal drag than the spending cuts from the sequester, so both aspects will support expansion. Moreover, we are hopeful that we can avoid any brinksmanship over the increase in the debt limit that is needed to fund the new budget and previous spending commitments. Faster growth in the economy will also reinforce the progress already made in cutting the budget deficit relative to GDP. The reduction in the budget deficit as a percent of GDP by well over half during the past four fiscal years, from 9.8 percent in FY2009 to 4.1 percent in FY2013, constitutes the most rapid pace of fiscal consolidation seen since the years following World War II. Further narrowing of the budget deficit, which is anticipated in coming years, will also reduce the need to borrow and help stabilize and then reduce our national debt.