Thursday, January 26, 2023
Solid Quarter to End 2022 but Tougher Sledding in Q1
The U.S. economy grew at a 2.9% annualized rate in the fourth quarter, slightly better than economists’ forecasts and driven by inventories, trade, and government spending. The solid overall growth follows the 3.2% annualized growth rate for U.S. gross domestic product (GDP) in the third quarter. While we believe this report provides clear evidence the U.S. economy did not enter recession in 2022, the composition of the growth, shown in the LPL Chart of the Day below, signals weak growth ahead in early 2023.
Real personal spending, roughly 70% of the economy, grew 2.1% annualized in the fourth quarter, slightly slower than the previous quarter’s 2.3% pace and below the Bloomberg-tracked consensus forecast of economists. Other data points received to date suggest consumer spending tailed off late in the fourth quarter, pointing to a weaker first quarter. A strong labor market and healthy stockpiles of savings supported consumer spending through 2022, but we don’t know how long this may last. Eventually consumers will retrench as they draw down savings, tap into credit, or pull back on spending. We may see more evidence of that in the first quarter, when growth is expected to stall out—consensus per Bloomberg sees a 0.1% increase in GDP in Q1.
Some of the secondary components of GDP made solid contributions to fourth quarter growth. Trade was a solid contributor to fourth quarter growth (0.6% of 2.9%). The resilience of international economies late last year, particularly in Europe, and a weaker U.S. dollar were supportive of net exports, on the margin. Inventories also made a significant contribution to fourth quarter GDP, driving roughly half of the 2.9% advance, as did government spending (0.6% of 2.9%).
Stripping out trade and inventory components to get final inflation-adjusted sales to domestic purchasers gives a good reading on the U.S. economy’s trajectory by isolating consumer spending and fixed investment spending. On that basis, sales rose 0.8% annualized during the fourth quarter after the third quarter’s 1.5% increase, illustrating a weaker trend of economic growth than the pre-pandemic trend.
Not surprisingly, residential investment subtracted from growth, by 1.3%, as borrowing costs have risen and hit housing demand. As housing normalizes in the coming quarters, this category will continue to be a drag on growth. Nonresidential fixed investment had less than a 0.1% impact on fourth quarter growth.
It is very unlikely the U.S. entered recession in 2022 given the strength of the consumer sector. However, excluding the more volatile categories, the trajectory for growth looks weak. That weaker growth trajectory should enable the Federal Reserve (Fed) to downshift to a 0.25% increase in its federal funds rate next week, and potentially pause after another same-sized hike in March.
A soft landing is still possible, though a mild, short-lived recession may be more likely at this point, with consumers being the determining factor of which way this breaks. A deteriorating housing market and aggressive moves by the Fed to date put the economy on unsure footing in early 2023, but markets may have priced in much of the near-term recession risks.
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