The United States economy expanded at a 2.7 percent annual rate from October through December 2022, a solid showing despite rising interest rates and elevated inflation, the government said Thursday in a downgrade from its initial estimate.
The government had previously estimated that the economy grew at a 2.9 percent annual rate last quarter.
The US Department of Commerce’s revised estimate of the fourth quarter’s gross domestic product (GDP) — the economy’s total output of goods and services — marked a deceleration from the 3.2 percent growth rate from July through September.
Thursday’s report revised down the government’s estimate of consumer spending growth in the October-December quarter, from a 2.1 percent rate to 1.4 percent. That was the weakest such showing since the first quarter of last year.
Business spending also slowed in the fourth quarter, suggesting that the economy lost momentum at the end of 2022.
More recent data, though, shows that the economy has since rebounded. Consumers boosted retail sales in January by the most in nearly two years, and employers added a surprisingly outsized number of jobs. The unemployment rate reached 3.4 percent, the lowest level since 1969.
Some of the surprisingly strong economic gains in January likely reflected much warmer-than-usual weather. Few economists expect similar outsize gains in hiring or spending in the coming months. Most analysts think growth is slowing to a roughly 2 percent annual rate in the current January-March quarter.
Higher interest rates
“The year as a whole was weak and the economy is sure to have a difficult 2023 as it struggles under the weight of the interest rate increases orchestrated by the Federal Reserve to quell the painfully high inflation,” warned Scott Hoyt, senior director of analytics at ratings agency Moody’s.
And the Federal Reserve is expected to keep raising its benchmark interest rate over the next few months and to keep it at a peak through year’s end to try to defeat still-high inflation. The minutes from its last policy meeting, released Wednesday, showed that all 19 Fed officials favoured raising rates at the next two meetings.
“From the Fed’s perspective, a slowdown in the economy is anticipated and will be welcome news,” said Rubeela Farooqi, chief US economist at High Frequency Economics, a consulting firm. “However, even as growth slows, a focus on lowering elevated inflation means rates will move up further and will remain higher for longer.”
Higher borrowing costs make mortgages, auto loans and credit card borrowing more expensive. Those higher rates could discourage consumers and businesses from spending, hiring and investing and could eventually push the economy into a recession.
The economy’s growth at the end of 2022 reflected mainly a restocking of inventories, which will likely unwind in coming quarters, and a pickup in government spending. Housing investment fell nearly 26 percent; higher borrowing rates have crushed homebuying.
Inflation, measured year over year, has cooled since it reached 9.1 percent in June, having slowed to 6.4 percent in January. Yet on a monthly basis, price gains accelerated from December to January, raising the prospect that the Fed will boost its benchmark rate higher than it has previously signalled.
In Thursday’s GDP report, the government also sharply revised up its estimates of Americans’ incomes in the fourth quarter. After-tax income, adjusted for inflation, jumped 4.8 percent, a much larger gain than the previous 3.3 percent estimate.
The upward revisions reflected higher wages and salaries than were estimated earlier, and state stimulus payments that were intended to offset inflated costs of petrol, food and other necessities. Twenty-one states, including California, Colorado, Florida, New York, Idaho and Pennsylvania, issued one-time payments last year, typically in the form of tax refunds.
The boost in incomes could continue to support consumer spending this year and might have helped drive retail sales up in January. If so, stronger consumer spending could force the Fed to continue raising rates or keep them elevated for longer to cool the economy and quell inflation.
