Quarter capped year of economic slowdown, reflecting return to more normal pace of growth.
The U.S. economy grew at a solid 2.9% annual rate last quarter but entered this year with less momentum as rising interest rates and still-high inflation weighed on demand.
U.S. growth in the fourth quarter was down slightly from a 3.2% annual rate in the third quarter, the Commerce Department said Thursday. Consumer spending helped drive the fourth-quarter gain, while the housing market weakened and businesses cut back their spending on equipment.
The October-to-December period capped a year of economic slowdown with growth of 1% in the fourth quarter of 2022 compared with a year earlier, down sharply from 5.7% growth in 2021. The slowdown in part reflected a return to a more normal pace of growth after output surged amid business reopenings, fiscal stimulus and a waning pandemic in 2021.
“Outside of the labor market, we’re really seeing a broad-based slowing in economic activity,” said Kathy Bostjancic, chief economist at Nationwide. “It’s not going to be a soft landing.”
U.S. stocks rose Thursday as economic figures and corporate earnings reports painted a mixed picture of the economy’s direction.
Investors have been closely scrutinizing economic data for signs that U.S. growth is coming under pressure from the Federal Reserve’s campaign of interest-rate increases aimed at cooling the economy and bringing down high inflation.
So far in 2023, many traders and portfolio managers appear satisfied that economic activity remains strong enough that a recession this year is far from certain. That conclusion, together with cooling inflation readings, has helped fuel a modest rebound in U.S. stock indexes following last year’s washout.’601950’10’20’70’80’902000-5051015%
The Fed is on track to slow interest-rate increases when it meets next week and debate how much higher to raise them this year as it tracks inflation’s trajectory and other economic developments.
The labor market has cooled some but continues to run strong. Jobless claims—a proxy for layoffs—fell last week and held near historic lows, despite the spread of layoff announcements beyond tech companies.
Workers received large wage gains through the end of last year. That helped consumer spending, the economy’s main engine, grow at a solid annual pace of 2.1% last quarter.
Despite some signs of resilience, recent data suggest consumers and businesses are starting to falter. Retail sales fell last month at the sharpest pace of 2022. Surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in January in the manufacturing and service sectors. Companies cut temporary workers in December for the fifth consecutive month, a sign that broader job losses could be on the horizon.
Many economists are concerned about the possibility of a U.S. recession this year. They worry that the Fed’s efforts to curb inflation could trigger broad spending cutbacks and job losses.
“Headwinds from the big jump in interest rates, consumers cutting back on discretionary spending and weak economies overseas were big problems for the U.S. in late 2022,” said Bill Adams, chief economist for Comerica Bank. “I expect real GDP growth will likely turn negative in the first half of this year.”
A buildup in inventories helped drive economic growth at the end of last year. That category is volatile, though.
Final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, dropped to a 0.2% annual pace in the fourth quarter from 1.1% in the third, the Commerce Department said, a sign of economic cooling in line with the Fed’s goals.
One of the most interest-rate-sensitive sectors—housing—is stumbling amid high mortgage rates. Residential investment declined throughout last year, while existing-home sales fell almost 18% in 2022 from the previous year.
Some economists say the worst of the housing downturn is over as mortgage rates are down from their peak last fall. But few expect a return to the boom times of 2021 any time soon.
The Fed had initially hoped it could bring down inflation with only a slowing in economic growth rather than an outright contraction, an outcome dubbed a “soft landing.”
“If we continue to get strong job growth and if we continue to get consumer spending on services, and companies don’t cut back on [capital expenditures], I think that adds fuel to the soft-landing story,” said Luke Tilley, chief economist at Wilmington Trust.
Consumer spending rose by 1.9% in the fourth quarter of 2022 compared with a year earlier, a slowdown from 7.2% growth in 2021 but close to 2019’s gain.
President Biden said Thursday that the latest data on growth was “very good news” and evidence that his economic plan “is actually working.” He said his focus now was to “protect those gains that our policies have generated” from House Republicans.
The Republican National Committee chided Mr. Biden for his portrayal of the economy. “Under Biden, real wages are down, inflation is up, energy costs are outrageously high, and families are poorer,” the RNC said on Twitter.
StoryBright Films, which provides photography and planning services for elopements in the Blue Ridge Mountains, photographed 16 couples’ elopements last year, down from 20 in 2021, said Mark Collett, the company’s co-owner.
Mr. Collett said his small business received many inquiries and engaged in conversations with a lot of potential clients last year. But more couples expressed concern about their financial situations and ability to pay for a big event than a year earlier.
“We would even get as far as sending them a contract to book, but then they got cold feet,” Mr. Collett said.
For 2022 marriages, clients tended to book at the bottom and top ends of the price range, rather than the middle, he added.
Purchasing power from paychecks fell for middle-income households last year, while it rose for lower-income and higher-income households. Many lower-income households benefited from wage increases and pandemic savings, while higher-income households had a large-enough savings buffer to spend aggressively.