The U.S. economy expanded at a faster-than-expected pace in the fourth quarter, but GDP still slowed compared to the previous three-month period and experts expect growth to slow further as higher interest rates exact their toll.
Gross domestic product (GDP) increased at a 2.9% annualized rate in the final three months of 2022, following growth of 3.2% in the third quarter, according to an initial estimate produced by the Bureau of Economic Analysis (opens in new tab) on Thursday. The second half of 2022 stood in stark contrast to the first six months of the year when GDP contracted in both Q1 and Q2.
The latest GDP figures, which are adjusted for inflation and are the first of three assessments, were goosed by inventory restocking and government spending. Personal consumption, which accounts for the largest slice of economic activity, rose 2.1%, which was below the sales forecast.
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Markets reacted to the mixed report with choppy trading. Indeed, the three major indexes struggled to stay positive in early trading. Ultimately, however, the blue-chip Dow Jones Industrial Average, broader S&P 500 and tech-heavy Nasdaq Composite all ended the day with gains.
With the Q4 GDP report now a matter of record, we checked in with economists and other market pros to see what they had to say about the state of the economy, markets and the Fed’s path going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.
What the experts say
(Image credit: Getty Images)
“The U.S. economy grew at a decent rate in the final quarter of last year but largely due to a jump in inventories and government spending that’s unlikely to be repeated. Real GDP rose 2.9% annualized in Q4, a little better than the market expected, following a 3.2% gain in Q3. For all of 2022, the economy expanded 2.1%, downshifting from the reopening bounce of 5.9% in 2021. Bottom line: The U.S. economy isn’t falling off a cliff but it is losing stamina and risks contracting early this year. That should limit the Fed to just two more small rate increases in coming months.” – Sal Guatieri, senior economist at BMO Capital Markets (opens in new tab)
“GDP rose 2.9%, of which inventories contributed 1.5 percentage points and foreign trade (opens in new tab) 0.6 percentage points, leaving just 0.8% growth in final domestic spending, which ultimately is what counts. Probably will be weaker in Q1, and inventory/trade will partly reverse, at least. So expect a clear drop in Q1 GDP.” – Ian Shepherdson, founder and chief economist of Pantheon Macroeconomics (opens in new tab)
“Overall, a good report on the U.S. economy as well as for the Federal Reserve. While the economy continued to grow ahead of potential output growth (about 1.8%), prices did not reflect such strength and continued to slow down. It was clear that inflation continued to slow and that firms, especially in the goods sector, lowered prices in order to sell more goods during the holiday season. Furthermore, the relative weakening of the service sector, if sustained, will reduce pricing pressures from that sector, which should help keep prices contained overall and help the Federal Reserve (Fed) in its quest to rein in inflation going forward.” – Eugenio Alemán, chief economist at Raymond James (opens in new tab)
“The economy grew decently in 2022 — the fears of a recession (opens in new tab) underway in the first half of last year were misplaced. However, the picture is different looking forward. The trend in real GDP weakened into year-end, and other economic indicators suggest the economy was on the cusp of contracting at the turn of the year. Other economic indicators like the ISM surveys of manufacturing and service-sector businesses show the private sector was contracting in late 2022. Financial indicators like the inverted yield curve (opens in new tab) also signal a strong likelihood of a recession ahead.” – Bill Adams, chief economist at Comerica Bank (opens in new tab)
“The Q4 GDP report will likely reignite conversations about the economy sticking a soft landing. Given the softer inflation data, the Fed will likely downshift the pace of rate hikes to 0.25% at next week’s meeting. However, other recession indicators are flashing red so upcoming monthly data, especially on the labor market, will be key for investors.” – Jeffrey Roach, chief economist at LPL Financial (opens in new tab)
“It is encouraging to see another quarter of positive GDP growth, despite a volatile global economy and persistent fears of a recession. Fortunately, we are seeing that the Fed’s aggressive interest rate hikes have started to slow inflation and consumer prices, giving the U.S. economy a stronger start to the new year. We also continue to expect that unemployment will remain below the natural long-run rate of 4.5% over the next two years. These factors will minimize some of the ripple effects of a potential recession and buy the Fed time to continue to reduce inflation.” – Steve Rick, chief economist at CUNA Mutual Group (opens in new tab)
“Real GDP grew at an annualized rate of 2.9% in the fourth quarter relative to Q3-2022. The outturn was a bit stronger than the consensus expectation, and it represents the second consecutive quarter of above-trend GDP growth. That noted the underlying spending components were not quite as impressive. Moreover, monthly data indicate that while the economy came into the fourth quarter with solid momentum, it ended the quarter with a distinct loss of momentum. Growth likely will be weak, at least relative to the last two quarters of 2022, in Q1-2023.” – Jay Bryson, chief economist at Wells Fargo Securities (opens in new tab)
“Thursday’s GDP report suggests that the economy is relatively strong even in the face of aggressive measures by the Federal Reserve to calm inflation. Consumer and businesses and consumers are moderating their spending after the initial exuberant post-pandemic surge and we expect this slowing of momentum to allow the economy to tick along solidly but on a slower and more sustainable path. While January is shaping up to be a strong month, stocks are still trying to find their footing and we expect a range-bound market for the foreseeable future. There are few near-term catalysts that will drive markets decisively up or down, as Federal Reserve policy and softening inflation and earnings growth are already priced into markets. – Carol Schleif, chief investment officer at BMO Family Office (opens in new tab)