US economy slowed, but still grew at 2.9% rate last quarter

Washington, Jan. 27 (BNA): The US economy expanded at an annual rate of 2.9% from October through December, ending 2022 with momentum despite pressure from high interest rates and widespread fears of a looming recession.


Thursday’s estimate from the Commerce Department showed that the country’s gross domestic product – the broader measure of economic output – slowed in the fourth quarter from the 3.2% annual growth rate it recorded from July through September.


Most economists believe the economy will slow further in the current quarter and slide into at least a moderate recession by the middle of the year, the AP reports.


The economy got a boost in the last quarter from flexible consumer spending and restocking of supplies by businesses. Federal government spending also helped lift the GDP. But with rising mortgage rates undercutting residential properties, investment in housing fell at an annualized rate of 27% for the second straight quarter.


For the full year 2022, GDP expanded 2.1% after growing 5.9% in 2021.


The expected economic slowdown in the coming months is an intended consequence of the Fed’s aggressive series of rate increases. The Fed’s hikes aim to slow growth, cool spending and crush the worst bout of inflation in four decades. Last year, the Fed raised its benchmark interest rate seven times. It is set to do so again next week, albeit this time with a smaller amount.


The resilience of the US labor market has come as a big surprise. Last year, employers added 4.5 million jobs, second only to the 6.7 million jobs added in 2021 in government records going back to 1940. Last month’s unemployment rate, 3.5%, matched its lowest level in 53 years.

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“The news couldn’t have been better,” President Joe Biden said of Thursday’s GDP report. “We are moving in the right direction. Now, we have to protect these gains.”


However, the good times for America’s workers are unlikely to last. As higher rates make borrowing and spending increasingly expensive throughout the economy, many consumers will spend less and employers will likely hire less.


“Recent data suggests that the pace of expansion may slow sharply in (the current quarter) as the effects of restrictive monetary policy take hold,” Rubela Farooqui, chief US economist at High Frequency Economics, wrote in a research report. “From the Fed’s perspective, a desired slowdown in the economy would be welcome news.”


Consumer spending, which fuels about 70% of the entire economy, rose at a solid 2.1% annual rate from October to December, down slightly from 2.3% in the previous quarter.


More recent numbers, including a 1.1% drop in retail sales last month, suggest that consumers are starting to back off.


“This suggests that higher rates are starting to take a bigger toll and set the stage for weaker growth in the first quarter of this year,” said Andrew Hunter, chief US economist at Capital Economics.


Bank of America economists expect growth to slow to an annual rate of 1.5% in the January-March quarter and then contract for the rest of the year — at a rate of 0.5% in the second quarter, 2% in the third, and 1.5% in the third quarter. in the fourth.

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The Fed has been responding to inflation which remains stubbornly high even though it has been gradually easing. Year-over-year inflation was raging at 9.1% in June, the highest level in more than 40 years. It has since eased – to 6.5% in December – but is still well above the Fed’s annual target of 2%.


“The US economy is not falling off a cliff, but it is losing its resilience and risks contracting early this year,” said Sal Guattieri, chief economist at BMO Capital Economics. That should limit the Fed to only two small rate hikes in the coming months.


One additional threat to the economy this year is rooted in politics: House Republicans could refuse to raise the federal debt limit if the Biden administration rejects their demand for sweeping spending cuts. Failure to raise the borrowing cap would prevent the federal government from being able to pay all of its obligations and could lead to a wrecking of its credit.


Moody’s Analytics estimates that the resulting disruptions could wipe out nearly 6 million American jobs in a recession similar to the devastating one caused by the 2007-2009 financial crisis.


At the very least, the overall economy is likely to start on firmer footing than it did at the start of 2022. Last year, the economy contracted at an annualized pace of 1.6% from January to March and by another 0.6% from April through June. Those two consecutive quarters of economic contraction raised fears of a recession beginning.

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On corporate earnings calls for the April-June quarter of 2022, nearly half of the companies in the S&P 500 indicated “recession” — the highest percentage since 2010 — according to data provider FactSet. Bank of America and Nomura forecasters forecast a recession in the October-December quarter.


But the economy regained strength over the summer, buoyed by resilient consumer spending and increased exports.







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