The US government slightly revised the annual growth rate for Q4 2022, lowering it from 2.7% to 2.6%. This comes alongside a significant downward revision in consumer spending, a key driver of economic growth.
The 2.6% annual growth rate for October-December 2022 was down from the 3.2% rate between July and September. In 2022, the US economy expanded by 2.1%, a considerable drop from the 5.9% growth in 2021.
The report suggests that the economy lost momentum towards the end of 2022. Consumer spending saw a 1% annual growth rate in Q4, revised from the previous 1.4% estimate. This was the weakest quarterly increase since the initial impact of COVID-19 in spring 2020. Spending on physical goods, such as appliances and furniture, declined for the fourth consecutive quarter.
More than half of last quarter's growth resulted from businesses restocking their inventories, which is not indicative of underlying economic strength.
Economists predict a sharp slowdown in growth for the January-March quarter, partly due to the Federal Reserve's consistent interest rate hikes to curb inflation. Rising borrowing costs have affected the housing industry and increased expenses for consumers and businesses, making major purchases less feasible. As a result, the economy is widely expected to enter a recession later this year.
The central bank has raised its benchmark interest rate nine times over the past year, aiming for a "soft landing" by slowing growth enough to control inflation without pushing the US economy into recession. However, analysts generally doubt the country can avoid a downturn as higher borrowing costs spread throughout the economy. The main point of debate is whether the recession will be mild, with minimal impact on employment and growth, or severe, with extensive layoffs.
The economic conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank on March 12, the second and third largest bank failures in US history, are also expected to hinder economic growth. Banks may impose stricter lending conditions to conserve cash and accommodate withdrawals from concerned depositors.
Oren Klachkin and Ryan Sweet of Oxford Economics noted in a research report that the US economy ended 2022 with "marginally less momentum." They added, "The economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend." They project a recession to begin in the second half of 2023.
Despite these challenges, the job market remains strong, with wage growth contributing to inflation. Hiring remains robust, and the unemployment rate is near its lowest point in half a century. Consumer confidence and spending are still relatively stable.
The Commerce Department's Thursday report marked its third and final GDP estimate for Q4 2022. On April 27, the department will release its initial growth estimate for the current quarter. FactSet's surveyed forecasters predict a deceleration to a 1.4% annual growth rate for the January-March quarter.
