The US economy picked up again in the fourth quarter, registering strong growth through the end of 2022 even as consumers and businesses battled historically high inflation and rising interest rates.
Gross domestic product – the broadest measure of economic activity – rose at an annual rate of 2.9% from October to December last year, according to the Commerce Department. data released Thursday. For 2022, GDP has increased by 2.1%, the report shows.
“The zeitgeist seems to be very negative these days in the economy, so I’m seeing people pick these numbers, and the numbers are good,” said Robert Frick, chief economist at Navy Federal Credit Union. “We don’t expect them to be extraordinary, because the economy is slowing down … but they are still positive.”
The 2.9% expansion last quarter, while a step back from the 3.2% annual growth seen in the third quarter, represents continued growth in the first half of the year when GDP declined.
After 2021, which saw GDP growth of 5.9% – the highest since 1984 – last year started with two back-to-back quarters of contraction. The declines are causing alarms, as two consecutive quarters of negative economic growth mark a rule, but not official, definition of a recession.
However, 2022 will be a transition year as the economy continues to recover from the pandemic. Trade imbalances and inventories had a significant impact on GDP data in the first half of the year.
But businesses have since changed supply chain snarls, and consumers are shifting their spending away from furniture, bicycles and other goods and toward services like travel and dining.
The strong economic growth registered in the fourth quarter was largely fueled by a “surprisingly strong consumer base,” said John Leer, chief economist at Morning Consult.
However, there are signs that it is beginning to decline, he said.
Spending in the fourth quarter of consumers, which is mainly focused on the service sectors, increased by 2.1%, a mark from the 2.3% obtained in the third quarter, according to the report on Thursday.
“Consumers are increasingly struggling to navigate the lingering effects from last year’s rising prices by taking out credit and saving,” Leer said. “With consumer demand likely to continue on a downward trajectory, business investment is also likely to slow in the coming quarters, increasing the likelihood of a recession this year.”
Last year, inflation surged to a 40-year high and remains stubbornly high, damaging consumer finances and confidence. The Federal Reserve has begun an aggressive effort to quickly raise interest rates to help reduce demand and lower inflation. While monetary policy changes need some time to take effect, some parts of the economy (especially housing) are growing weak.
Thursday’s report showed that residential fixed investment fell 26.7% during the last three months of the year, slightly narrower than the third quarter’s decline of 27.1%. Business investment in equipment fell 3.7% in the last quarter of the year.
Inflation, which is slowing, remains the wild card for 2023, Frick said.
“Inflation is the bogeyman here, and the less bogeyman we have, the less pressure on all the other things that hold the economy down — consumer spending, business spending, government spending,” he said in CNN.
Expect the first six months of the year to be very dynamic, he said.
“A lot of it will depend on which of these things will disappear the fastest: If it’s inflation, we’re in good shape; and if it’s consumer spending, we’re not in very good shape,” he said. “But I think there are more positives we’re looking at now than we did in November.”
Economists expect fourth-quarter GDP to grow at an annualized adjusted rate of 2.6%, according to Refinitiv.
Thursday’s GDP numbers are the first of three official estimates to be released by the Commerce Department for the fourth quarter. GDP data is updated frequently, sometimes years later.