The US economy ended 2022 in solid shape, although questions remain as to whether growth will turn negative next year.
Fourth-quarter gross domestic product, the sum of all goods and services produced from October to December, rose 2.9% on an annualized basis, the Commerce Department reported on Thursday. Economists polled by Dow Jones had expected a figure of 2.8%.
The growth rate was slightly slower than the 3.2% seen in the third quarter.
Equities performed mixed after the report, while government bond yields were mostly higher.
Consumer spending, which accounts for about 68% of GDP, rose by 2.1% over the period, down slightly from 2.3% in the previous period, but still positive.
Inflation readings fell significantly towards the end of the year after hitting 41-year highs in the summer. As expected, the price index for private consumption rose by 3.2%, but fell significantly from 4.8% in the third quarter. Excluding food and energy, the chain-weighted index rose 3.9% versus 4.7%.
While inflation numbers point to price increases, they remain well above the Federal Reserve’s 2% target.
Along with the consumer boost, increases in personal inventory investment, government spending and non-residential fixed investment helped lift the GDP figure.
A 26.7% slump in residential fixed investment, mirroring a sharp slump in home construction, slowed growth, as did a 1.3% fall in exports. The housing decline subtracted about 1.3 percentage points from the overall GDP figure.
Federal government spending increased 6.2%, mainly due to an 11.2% increase in non-defense spending, while state and local government spending increased 2.3%. Government spending contributed a total of 0.64 percentage points to GDP.
Inventory increases also played an important role with almost 1.5 percentage points.
“The growth mix was disheartening and monthly data suggests the economy lost momentum during the fourth quarter,” wrote Andrew Hunter, senior US economist for Capital Economics. “We continue to believe that the lagged effect of interest rate hikes will push the economy into a mild recession in the first half of this year.”
The report closes a volatile year for the economy.
After a 2021 in which GDP posted the strongest increase since 1984, the first two quarters of 2022 started with negative growth, in line with a widely held definition of a recession. However, resilient consumer and a strong labor market helped growth turn positive in the last two quarters and gave hope for 2023.
“Just as the economy was not as weak in the first half of 2022 as GDP reports suggested, it is also not as strong as the fourth-quarter GDP release suggests,” said Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors. “The economy grew at a solid pace late last year, buoyed by resilient consumer spending, but remains vulnerable to a more pronounced slowdown in the coming quarters.”
A separate economic report on Thursday highlighted a strong, tight labor market. Weekly jobless claims fell 6,000 to 186,000, the lowest since April 2022 and well below the Dow Jones estimate of 205,000.
Durable goods orders were also much better than expected, rising 5.6% in December compared to the 2.4% estimate. However, orders were down 0.1% excluding transportation as demand Boeing Passenger planes helped boost the headline count.
Despite the relatively strong economic data, most economists believe a recession is very likely this year.
A series of aggressive Fed rate hikes aimed at taming runaway inflation are expected to materialize this year. The Fed has raised interest rates by 4.25 percentage points since March 2022, the highest since late 2007. Rate hikes are generally delayed, meaning the real impact may not be felt for some time to come.
Markets take it almost certain that the Fed will announce another quarter-point hike at next week’s meeting, and likely another hike of a similar magnitude to follow in March.
Some sectors of the economy showed signs of recession, although overall growth was positive. Residential construction, in particular, lagged, with December building permits down 30% yoy and housing starts down 22%.
Fourth-quarter earnings reports from companies are also signaling a possible earnings recession. With nearly 20% of S&P 500 companies reporting, earnings are down 3%, according to Refinitiv, even on revenue growth of 4.1%.
Consumer spending is also showing signs of slowing, with retail sales falling 1.1% in December.