The economy grew less than expected in the fourth quarter due to a slowdown in consumer spending

The US economy grew at a slower-than-expected 2.7% year-on-year from October to December, the Commerce Department said Thursday, lowering its forecast from its original estimate.

The state agency earlier estimated that the economy grew 2.9% year-on-year last quarter.

The Department of Commerce’s revised estimate of fourth-quarter gross domestic product — the total output of goods and services in the economy — noted a 3.2% slowdown in growth from July to September.

In a report released Thursday, the government’s estimate of October-December consumer spending growth was revised down from 2.1% to 1.4%. It was the weakest figure since the first quarter of last year.

Business spending also slowed in the fourth quarter, suggesting the economy lost momentum at the end of 2022.

However, more recent data shows that the economy has since recovered. Consumers increased retail sales in January to the highest in almost two years, and employers added an unexpectedly large number of jobs. The unemployment rate reached 3.4%, the lowest level since 1969.

Some of the unexpectedly strong economic gains in January likely reflected much warmer-than-usual weather. Few economists expect a similar surge in hiring or spending in the coming months. Most analysts believe that in the current quarter from January to March, growth will slow to about 2% year on year.

The Federal Reserve is expected to continue raising its benchmark interest rate over the next few months and keep it at its peak until the end of the year to try to beat the still high inflation. Published on Wednesday, the minutes of the last meeting of the Fed showed that all 19 Fed representatives were in favor of raising rates at the next two meetings.

“From the Fed’s point of view, a slowdown in economic growth is expected, and this will be welcome news,” said Rubila Farooqi, chief US economist at the consulting firm High Frequency Economics. “However, even as growth slows, focusing on lowering elevated inflation means rates will rise further and remain high for longer.”

Higher borrowing costs make mortgages, car loans, and credit card borrowing more expensive. These higher rates could deter consumers and businesses from spending, hiring and investing, and could eventually push the economy into recession.

Growth in the economy at the end of 2022 mainly reflected restocking, which is likely to fade in the coming quarters, as well as increased government spending. Housing investment fell nearly 26%; higher borrowing rates have crushed home buying.

Year-on-year inflation has declined since hitting 9.1% in June and falling to 6.4% in January. However, on a monthly basis, price increases accelerated from December to January, raising the likelihood that the Fed will hike its benchmark rate higher than it previously signaled.

In Thursday’s GDP report, the government also sharply revised its fourth-quarter income estimates upwards for Americans. After-tax income, adjusted for inflation, jumped 4.8%, much more than the previous estimate of 3.3%.

The upward revisions reflected higher wages and salaries than previously anticipated, as well as government stimulus payments intended to offset inflated prices for gas, food and other necessities. Twenty-one states, including California, Colorado, Florida, New York, Idaho and Pennsylvania, made lump sum payments last year, usually in the form of tax refunds.

Earnings growth may continue to support consumer spending this year and may have helped boost retail sales in January. If so, higher consumer spending could force the Fed to keep raising rates or keep them high for longer to cool the economy and tamp down inflation.