US economy posts strong growth in Q4, but with underlying weakness

WASHINGTON, Jan 26 (Reuters) – The US economy grew faster than expected in the fourth quarter, but that likely overstates the nation’s health, as a measure of domestic demand rose at its slowest pace in two and a half years, reflecting the impact of higher borrowing costs.

The Commerce Department’s anticipated fourth-quarter gross domestic product report showed on Thursday that half of the boost to growth came from a sharp increase in inventory held by businesses, some of which is likely to be unwanted.

While consumer spending maintained a strong pace of growth, a large part of the increase in consumption occurred early in the fourth quarter. Retail sales weakened considerably in November and December. Business spending on equipment contracted last quarter and is likely to remain on the downside as demand for goods weakens.

It could be the last quarter of strong GDP growth before the lingering effects of the most rapid cycle of Federal Reserve tightening since the 1980s are fully felt. Most economists expect a recession by the second mid-year, albeit brief and mild compared to previous slowdowns, due to the extraordinary strength of the labor market.

“The US economy is not falling off a cliff, but it is losing steam and is at risk of contracting early this year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “That should limit the Fed to just two more small rate hikes in the coming months.”

Gross domestic product increased at an annualized rate of 2.9% last quarter. The economy grew at a rate of 3.2% in the third quarter. Economists polled by Reuters had forecast that GDP would rise at a rate of 2.6%.

Solid growth in the second half erased the 1.1% contraction in the first six months of the year. By 2022, the economy expanded 2.1%, down from 5.9% in 2021. Last year, the Fed raised its policy rate by 425 basis points from near zero to a 4.25% range. -4.50%, the highest since the end of 2007.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a rate of 2.1%, primarily reflecting a rebound in spending on goods earlier in the quarter, primarily on vehicles motorized. Consumers also spent on services like health care, housing, utilities, and personal care.

Spending, which grew at a rate of 2.3% in the third quarter, has been supported by the resilience of the labor market and excess savings accumulated during the COVID-19 pandemic. Income available to households after inflation increased at a rate of 3.3% after rising at a rate of 1.0% in the third quarter. The savings rate rose to 2.9% from 2.7%.

But demand for long-lived manufactured goods, which are mostly bought on credit, has waned and some households, especially low-income ones, have depleted their savings.

As a result, inventories increased at a rate of $129.9 billion compared to the rate of $38.7 billion in the prior quarter, adding 1.46 percentage points to GDP growth. There were also contributions from public spending and a lower trade deficit.

Excluding inventories, public spending and trade, domestic demand increased at a rate of just 0.2%. That was the smallest increase in private domestic final sales since the second quarter of 2020 and was a slowdown from the 1.1% pace of the third quarter.

“Rising inventories could bode poorly for growth in early 2023 as corporations may look to reduce excess inventories of goods,” said Erik Norland, senior economist at CME Group.

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. US Treasury prices fall.

ROLLING RECESSION

Despite clear signs of a weak carryover to 2023, some economists are cautiously optimistic that the economy will avoid a full-blown recession and instead suffer a creeping recession with sectors declining in turns rather than all at once. .

They argue that monetary policy now operates with a shorter lag than before due to technological advances and US central bank transparency, which they said resulted in financial markets and the real economy acting in anticipation of rate hikes.

Although residential investment suffered its seventh consecutive quarterly decline, the longest streak since the collapse of the housing bubble triggered the Great Recession of 2007-2009, there are signs that the housing market may be stabilizing.

Mortgage rates have been on a downward trend as the Federal Reserve slows the pace of its rate hikes.

“Much of the reaction to higher interest rates is already in the economy and financial markets,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles. “Since the Fed has managed to precipitate an ongoing recession, it’s time to think about an exit strategy.”

Inflation also eased in the fourth quarter. A measure of inflation in the economy rose at a rate of 3.2%, pulling back from the 4.8% pace of increase in the third quarter.

While many parts of the economy have shifted to a lower gear, the job market shows no signs of a substantial cooling.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 6,000 to a seasonally adjusted 186,000 for the week ending Jan. 1. on Jan. 21, the lowest level since April 2022. The number of people receiving benefits after an initial week of aid, a hiring indicator, increased by 20,000 to 1.675 million for the week ending Jan. 1. 14

Companies outside the technology industry, as well as interest rate-sensitive sectors like housing and finance, are hoarding workers after struggling to find work during the pandemic.

“There are no signs in the latest jobless claims data that the job market is cracking at the start of the new year,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.

Reporting by Lucía Mutikani; Edited by Chizu Nomiyama, Paul Simao, and Andrea Ricci

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