GDP report: Economy grew solidly in 4th quarter but recession fears remain. Here's what to know.
After limping out of the starting gate in 2022, the economy closed out the year with a flourish.
But economists say the strong performance will do little to head off the mild recession they’re expecting in 2023.
For all of last year, growth pulled back significantly after reaching the fastest pace in 37 years in 2021.
The nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 2.9% in the fourth quarter, the Commerce Department said Thursday. Economists surveyed by Bloomberg had forecast a 2.6% rise in output.
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Solid gains in consumer spending and business stockpiling more than offset another dismal quarter for housing..
Overall in 2022, the economy grew 2.1% following a 5.9% advance the prior year that was juiced by an easing pandemic.
Last year’s performance offered a split-screen narrative as the economy contracted the first two quarters before growing 3.2% in the third quarter and 2.9% in the final three months of the year.
But just as the feeble showing in early 2022 almost certainly didn’t signify a recession – instead reflecting changes in volatile business stockpiling and trade – the sturdy fourth quarter numbers don’t herald a brighter outlook.
Employers were still adding a booming 539,000 jobs a month on average in the first quarter of last year, compared with a solid but steadily falling 247,000 in the final three months.
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And in December, retail sales, industrial production and housing starts all fell more rapidly than projected following the Federal Reserve’s sharp interest rate hikes throughout the year.
“This in turn sets the stage for potentially weaker growth in the first quarter,” says Matt Colyar, an economist at Moody’s Analytics wrote in a note to clients.
That’s largely what the Fed wants.
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The Fed’s campaign is aimed at bringing down annual inflation that hit a 40-year high of 9.1% in June before easing to 6.5% by the end of the year. Most economists surveyed by Wolters Kluwer Blue Chip Economic Indicators believe the strategy will tip the nation into a modest recession in the first half of 2023 as the economy contracts in both the first and second quarters.
The GDP report provided some signposts of the weakness ahead. After stripping out volatile categories such as business stockpiling, trade and government spending, final sales to domestic purchasers grew just 0.2% in the final three months of the year.
Barclays is forecasting 600,000 net job losses during a six-month recession while Wells Fargo predicts up to 2 million – relatively mild numbers compared with the last two downturns in 2007-09 and 2020.
Here’s how various elements of the economy did in the fourth quarter:
Consumer spending in 2022
Despite high inflation and rising interest rates, Americans continued to spend at a solid clip.
Consumer spending, which makes up 70% of economic activity, grew 2.1% following a 2.3% rise in the third quarter.
Household purchases have been underpinned by solid job and wage growth and about $1.5 trillion in additional savings built up during the pandemic. Those reserves have dwindled from a peak of $2.6 trillion in 2021 and lower-income households largely have depleted their extra cash but higher-income Americans are still making up for time lost during the pandemic.
As COVID-19 worries have ebbed, consumers are shifting their spending from goods to services as they resume activities such as traveling and going to the theater.
But consumption is expected to pull back further next year as interest rates rise and job growth slows.
Business stockpiling boosts growth
Businesses added more rapidly to their inventories after drawing them down the previous quarter, adding a whopping 1.46 percentage points to growth.
Such stockpiling has been volatile and doesn't typically reflect the economy's underlying health. Companies padded their inventories in 2021 in response to supply chain bottlenecks and product shortages, leading to big swings in recent months.
Business investment increases more slowly
Business investment rose a modest 0.7%, down from a 6.2% increase the prior quarter.
Outlays for computers, delivery trucks, factory machines, and other equipment fell 3.7% amid rising interest rates, which increases borrowing costs, and flagging consumer demand.
Spending on buildings, oil rigs, and other structures edged up 0.4%.
Trade aids economy
Trade was a modest positive for the economy after providing a big bump in the previous two quarters.
Exports fell 1.3% as economic weakness overseas crimped customer demand.
Imports, though, declined by a larger 4.6% as Americans began pulling back spending. That narrowed the trade deficit and boosted overall growth.
Government spending increases
Government outlays rose 3.7% for the second straight month. Federal spending increased by 6.2% and state and local purchases rose by 2.3%.
Housing market slides with high mortgage rates
Housing construction and renovation plunged 26.7% following a 27.1% drop in the prior three-month period, marking the seventh straight quarterly decline.
Fed rate hikes have driven up mortgage rates, decimating home sales and building. Fixed, 30-year mortgage rates have dipped the past two months to about 6.3% from 7% but are up from about 3% early this year, according to Freddie Mac.
Jobless claims decline
In other economic news, fewer Americans filed for unemployment benefits last week.
Applications for jobless aid in the U.S. for the week ending Jan. 21 fell by 6,000 last week to 186,000, from 192,000 the previous week, the Labor Department reported Thursday. It’s the first time in nine months that the number has been below 200,000 in back-to-back weeks.
Yet the recent surge in layoff announcements will translate to much higher claims in the second quarter, says Ian Shepherdson, chief economist of Pantheon Macroeconomics.
Contributing: Associated Press
This article originally appeared on USA TODAY: BEA GDP shows 4th quarter economy grew but recession fears remain