In 2023, the economy grew at a pace of 2.5%, surprising many analysts who expected slower growth or even the possibility of a recession, stemming in part from Federal Reserve (Fed) monetary policy.1 The Fed, in early 2022, turned its focus to slowing the economy and tempering inflation, which became a major issue beginning in 2021. The Fed raised short-term interest rates 11 times between March 2022 to July 2023.
Despite that, the U.S. labor market remained strong, wage growth began to exceed the inflation rate, and consumers maintained consistently solid spending, which proved to be the most important factor driving economic growth.
In addition, government spending was a positive contributor to economic growth. “Spending programs that passed in the first two years of the Biden administration had an influence on the rate of economic growth in 2023,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. These included an infrastructure investment package and the Inflation Reduction Act, which includes incentives for green energy projects. Those dollars started to have more impact in 2023, and may again in 2024, according the Haworth.
As for the stock market during Biden’s tenure, it experienced whipsaw-like volatility. The benchmark S&P 500 generated impressive returns of 28.7% in 2021 and 26.29% in 2023. Sandwiched in between was a bear market, as the S&P 500, at its low point, lost 25% of its value in 2022.2 The market in 2021 benefited from the U.S. economy growing at its fastest pace since 1984. However, rising inflation and the Fed's aggressive response to it, took a toll on stocks in 2022. 2023’s stock market recovery was narrower in nature, driven primarily by a small group of S&P 500 sectors dominated by technology-oriented stocks. In the opening weeks of 2024, the S&P 500 reached new all-time highs, closing over the 5,000 mark for the first time.