Commerce Department: US economy slowed down, but GDP still grew 2.9% in the fourth quarter

WASHINGTON (AP) — The US economy grew 2.9% year-on-year from October to December, ending 2022 on a strong note despite pressure from high interest rates and widespread fears of a looming recession.

Thursday’s Commerce Department estimate showed that the country’s gross domestic product – the broadest measure of economic output – slowed last quarter from a 3.2% annualized growth rate recorded from July to September. Most economists believe that the economy will continue to slow down in the current quarter and slide into at least a mild recession by the middle of the year.

The economy received a boost last quarter thanks to robust consumer spending and restocking by businesses. Federal government spending also helped raise GDP. But as higher mortgage rates undermine residential real estate, home investment is down 27% year-on-year for the second quarter in a row.

For all of 2022, GDP increased by 2.1% after rising by 5.9% in 2021.

The expected slowdown in the economy in the coming months is the supposed consequence of a series of aggressive rate hikes by the Federal Reserve. The Fed’s hike is designed to reduce growth, cut spending and quell the worst inflation spike in four decades. Last year, the Fed raised the base rate seven times. He’s going to do it again next week, albeit on a smaller scale this time.

The resilience of the US labor market came as a big surprise. Employers added 4.5 million jobs last year, second only to the 6.7 million that were added in 2021 in government records dating back to 1940. And last month’s unemployment rate of 3.5% was a 53-year low.

But the good times for American workers are unlikely to last. As higher rates make borrowing and spending more and more expensive in the economy, many consumers will spend less and employers are likely to hire less.

“Looking ahead, the latest data suggests that growth could slow sharply in (the current quarter) as the effects of restrictive monetary policy intensify,” Rubila Farooqi, chief US economist at High Frequency Economics, wrote in a research report. “From the Fed’s point of view, the desired economic slowdown will be welcome news.”

Economists at Bank of America expect growth to slow to 1.5% year-on-year in the January-March quarter and then contract through the end of the year, down 0.5% in the second quarter, 2% in the third and 1.5%. in the fourth.

The Fed has been reacting to the inflation rate, which remains consistently high, albeit gradually declining. Year-on-year inflation reached 9.1% in June, the highest level in more than 40 years. It has since declined to 6.5% in December, but is still well above the Fed’s annual target of 2%.

Another threat to the economy this year is rooted in politics: Republicans in the House of Representatives may refuse to raise the federal debt limit if the Biden administration rejects their demand for massive spending cuts. Failure to raise the borrowing ceiling would prevent the federal government from paying all of its obligations and could destroy its creditworthiness.

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

At the very least, the economy is likely to start the year on a stronger footing than it did at the start of 2022. Last year, the economy contracted 1.6% year-on-year from January to March and another 0.6% from April to June. These two consecutive quarters of the economic downturn have raised fears that a recession could start.

But the economy rebounded over the summer, supported by robust consumer spending and rising exports.

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texasstandard.news contributed to this report.

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