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The numbers: The economy grew at a robust 2.9% annual pace in the fourth quarter, but the U.S. faces tough odds to repeat its performance in 2023 as rising interest rates sap growth and threaten to foment a recession.
Gross domestic product, the official scorecard for the economy, expanded at an above-normal rate for the second quarter in a row. GDP also increased by 3.2% in the third quarter following a pair of negative readings in the first half of 2022.
Yet the economy is entering a more turbulent span after the Federal Reserve ratcheted up a key U.S. interest rate to a 15-year high in an effort to tame the worst inflation in 40 years.
Higher borrowing costs slow inflation by reducing consumer spending and business investment. But rising rates also puncture the economy and often lead to recession.
Wall Street economists predict the U.S. will slow to a crawl in the first quarter — and barely grow at all this year. Some even think the U.S. is already in recession.
GDP grew at a 2.1% rate in 2022, down from 5.9% in 2021. All figures are adjusted for inflation.
Key details: Consumer spending, the main engine of the economy, increased at a solid 2.1% annual clip in the four quarter, the government said. That’s down a bit from a 2.3% pace in the prior quarter.
The resilience of consumer spending was one of the big bright spots in the GDP report. Household outlays account for 70% of all U.S. economic activity. If Americans keep spending, the economy might avoid a recession altogether.
Business spending was mixed.
Investment in new housing sank again as high mortgage rates drove away potential home buyers. Spending on new equipment also declined.
The growth in inventories, or unsold goods, rose by $91.2 billion. That gave even more of a boost to fourth-quarter GDP than consumer spending.
Don’t look for another big gain in the 2023 first quarter. Businesses are more careful about how much they produce against the backdrop of a weakening economy.
The trade deficit, which caused huge swings in GDP last year, played a smaller role in the fourth quarter. A lower trade gap added about 0.6 percent points to U.S. growth.
Government spending rose at a 3.7% clip for the second quarter in a row.
Inflation rose at an annual 3.2% pace in the fourth quarter, compared to a 4.3% advance in the prior three-month period.
GDP is updated twice after the initial results are published.
Big picture: The economy faces its biggest challenge in 2023 since the lockdowns during the pandemic three years ago.
Inflation is still high. Interest rates are expected to keep going up. And most of the huge federal stimulus doled out to households and businesses is gone.
What could save the economy from a recession is a rapid slowdown in inflation and a resilient labor market.
Falling inflation could allow the Fed to step back, and so long as most people are working, they are likely to keep spending and help the U.S. economy stay afloat.
Looking ahead: “The economy grew decently in 2022. The fears of a recession underway in the first half of last year were misplaced,” said chief economist Bill Adams of Comerica.
“However, the picture is different looking forward. The trend in real GDP weakened into year-end, and other economic indicators suggest the economy was on the cusp of contracting at the turn of the year.”
“The U.S. economy isn’t falling off a cliff, but it is losing stamina and risks contracting early this year,” said senior economist Sal Guatieri of BMO Capital Markets. “That should limit the Fed to just two more small rate increases in coming months.”
Market Reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Thursday trades
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