U.S. economic growth in the fourth quarter of 2022 (October-December 2022) outperformed market expectations and moderately slowed as the Fed hopes to keep inflation under control without impeding growth.
But economists who have dug into the details of the statistics also see enough warning signs to suggest there remains a significant risk of a recession later this year, particularly in slowing consumer spending.
Actual October-DecemberＧＤＰPreliminary figures show a year-on-year increase of 2.9%. July-September (third quarter) was up 3.2%. Separately released labor market data also showed a resilience to the economy rather than a recession crisis.
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U.S. Unemployment Insurance Claims Unexpectedly Drop Again, Nine-Month Low (1)
Upper row: GDP, Lower row: Personal consumption (both quarter-on-quarter, seasonally adjusted annual rates)
Source: Department of Economic Analysis
For the Fed, which has pushed for unusually aggressive rate hikes, the data suggest the economy still has a long way to go for a “soft landing.”
“The economy is slowing, but the better-than-expected numbers should ease recession fears,” said Fawad Razakzada, a market analyst at City Index. “This is a ‘Goldilocks’ scenario. It should be positive for risk assets.”
“Clear stall”
Meanwhile, recession watchers have focused on some key numbers in the GDP statistics. Personal consumption, which accounts for the largest part of the US economy, grew by 2.1%, lower than expected, and real domestic final demand, which excludes net exports and inventories from GDP, increased by only 0.8% annually from the previous quarter. Increased 1.5% in the previous quarter. Private sector final demand increased by 0.2%, the slowest growth since the April-June quarter of 2020.
The Fed’s main price indicator, the Personal Consumption Expenditures (PCE) price index, rose 3.2% a year. It was the slowest growth since 2020, slowing from a 4.3% rise in the previous quarter. Core, which excludes food and energy, rose 3.9%. The slowest growth since the January-March quarter of 2021. It has risen 4.7% in each of the previous two quarters. The December PCE will be announced on the 27th.
“When you look at the consumer, the backbone of the U.S. economy, the slowdown is clear,” Lindsay Piegza, chief economist at Stifle Nicholas & Co., told Bloomberg Television. “You simply can’t sustain positive growth unless your consumers are satisfied and healthy,” she said, much less the “strong growth” seen at the end of last year.
underlying economic activity
“Services consumer spending drove strong growth in the fourth quarter, but the good news ends there, excluding volatile factors such as net exports and inventories and government spending,” said Eliza Winger, an economist at Bloomberg Economics. “Two indicators of underlying economic activity point to a significant slowdown.”
Economists expect the U.S. economy to contract in the second and third quarters, with a 65% chance of a recession over the next year, according to a monthly Bloomberg survey.
Fed rate hikes are expected to hit households even harder this year. It usually takes months before rising borrowing costs start to affect lives.
Stifle Chief Economist Lindsey Piegza Talks GDP Statistics
Source: Bloomberg
“Policy Mistake”
Tightening monetary policy is already putting pressure on other parts of the economy. Capital investment slowed down sharply in October-December. As the housing boom headed toward a reversal, housing investment continued to stagnate.
Investors are pricing in a tightening cycle coming to an end, with a 25 basis point rate hike expected at next week’s Federal Open Market Committee (FOMC) meeting. Meanwhile, Fed officials have suggested keeping interest rates high through the rest of the year until inflation is beaten.
Still, a worsening snowball of slowing consumer spending in GDP data could force the Fed to reverse course by the end of the year, said Gregory Daco, chief economist at Ernst & Young. Mr. is watching.
“The Fed’s strong commitment to aggressive tightening and the lag time for policy to affect economic activity increase the probability of policy mistakes,” he said. “There is still a good chance there will be two rate cuts in the second half of 2023,” he said.
Statistics details
2022 full-year GDP will increase by 2.1%. The U.S. economy grew 5.9% in 2021, its fastest growth since 1984, as demand bounced back from the economic shutdowns related to the coronavirus pandemic.
Service spending in the October-December quarter grew at an annualized rate of 2.6%, the slowest growth since the first quarter of last year. Spending on goods rose 1.1%, the first positive since 2021.
Capital investment, which grew significantly by 6.2% in the July-September quarter, slowed sharply to a 0.7% increase in the October-December quarter. Equipment investment fell 3.7%, the biggest drop since the April-June quarter of 2020.
Residential investment fell 26.7% annually, marking the seventh consecutive quarter of negative growth. Home sales last year saw their biggest drop since 2008 on the back of soaring mortgage rates.
U.S. second-hand home sales continue to decline in December
The contribution of net exports to GDP was 0.56 points and inventories 1.46 points.
The revised GDP figures for the October-December quarter will be announced in late February. The committee that dates business cycles at the National Bureau of Economic Research (NBER) uses averages of GDP and Gross Domestic Income (GDI), as well as a variety of other economic indicators, to identify recessions.
Determining a U.S. recession has never been more difficult; strong and weak signals pile up
See table for detailed statistics.
Original title:US Economy Shows Slowdown Signs After Growing 2.9% Last Quarter(excerpt)
news-rsf-original-reference paywall">Original title:US Economy Cools Like the Fed Wants, Still Risks a Stall in 2023(excerpt)
(Add statistical details and comments.In the article before the update, the 1st quarter in the 1st paragraph has been corrected to the 4th quarter)