The US economy showed a solid performance in the fourth quarter of 2022, expanding at an annual rate of 2.7 percent despite rising interest rates and inflation. This is a downgrade from the initial estimate of 2.9 percent growth. The Department of Commerce’s revised GDP figure marks a deceleration from the 3.2 percent growth rate from July to September.
Consumer spending was weaker than expected, with a revised rate of 1.4 percent, the weakest since the first quarter of 2021. Business spending also slowed in the fourth quarter, indicating that the economy had lost momentum by the end of 2022.
Recent data, however, suggests that the economy has since rebounded. Retail sales rose by the most in nearly two years in January, and employers added a surprisingly large number of jobs, pushing the unemployment rate to its lowest level since 1969. While some of these gains may have been due to warmer-than-usual weather, few economists expect similar outsize gains in hiring or spending in the coming months. Most analysts predict growth will slow to around 2 percent in the current January-March quarter.
The Federal Reserve is expected to continue raising its benchmark interest rate over the next few months and keep it at a peak through the end of 2023 in order to combat still-high inflation. Higher borrowing costs make mortgages, auto loans and credit card borrowing more expensive, which could discourage consumers and businesses from spending, hiring and investing and eventually lead to a recession.
The fourth quarter growth was mainly driven by restocking of inventories and an increase in government spending, while housing investment fell nearly 26 percent due to higher borrowing rates. Inflation has cooled since it reached 9.1 percent in June, but monthly price gains accelerated from December to January, suggesting that the Fed may raise its benchmark rate higher than previously signalled.
The upward revisions of Americans’ incomes in the fourth quarter also contributed to the economic performance. After-tax income, adjusted for inflation, jumped 4.8 percent – much higher than the 3.3 percent estimate – due to higher wages and salaries and state stimulus payments. This could continue to support consumer spending this year and could have been a factor in January’s retail sales increase. If so, stronger consumer spending could force the Fed to keep raising rates or keep them elevated for longer to cool the economy and quell inflation.