The U.S. economy ended 2022 in great shape, although questions persist about whether growth will turn negative in the year ahead.
Fourth-quarter gross domestic product, the sum of all goods and services produced for the October-December period, rose at an annualized rate of 2.9%, the Commerce Department reported Thursday. Economists polled by Dow Jones had expected a reading of 2.8%.
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The growth rate was slightly lower than the 3.2% pace recorded in the third quarter.
Stock market futures rose following the report, while Treasury yields were also mostly higher.
Consumer spending, which accounts for about 68% of GDP, rose 2.1% for the period, down slightly from 2.3% in the prior period, but still positive.
Inflation readings have fallen significantly. The personal consumption expenditure price index rose 3.2%, in line with expectations, but down sharply from 4.8% in the third quarter. Excluding food and energy, the on-chain index rose 3.9% from 4.7% previously.
Along with the consumer boost, increased private investment in inventory, government spending and non-residential fixed investment helped lift the GDP figure. A 26.7% drop in residential fixed investment, reflecting a sharp decline in housing, dampened growth, as did a 1.3% decline in exports.
“The growth mix was discouraging and monthly data suggests the economy lost momentum in the fourth quarter,” wrote Andrew Hunter, senior US economist for Capital Economics. “We still expect the lagged impact of the spike in interest rates to push the economy into a mild recession in the first half of this year.”
The report closes a volatile year for the economy.
After a year 2021 that saw GDP grow at its fastest pace since 1984, the first two quarters of 2022 started with negative growth, matching a commonly accepted definition of a recession. However, a resilient consumer and strong labor market helped growth turn positive over the past two quarters and gave hope for 2023.
A separate economic report on Thursday highlighted a strong and tight labor market. Weekly jobless claims fell by 6,000, falling to 186,000 for the lowest reading since April 2022 and well below the Dow Jones estimate of 205,000.
Durable goods orders were also much better than expected, rising 5.6% in December, versus an estimate of 2.4%. However, orders fell 0.1% excluding transportation, as demand for Boeing passenger planes helped grab the headlines.
Despite fairly strong economic data, most economists think a recession is a strong possibility this year.
A series of aggressive interest rate hikes by the Federal Reserve aimed at tackling runaway inflation should play out this year. The Fed has raised its benchmark borrowing rate by 4.25 percentage points since March 2022 to its highest rate since late 2007. Rate hikes typically operate with lags, meaning their actual effect could do not make themselves felt before the future.
Markets see near certainty that the Fed will adopt another quarter-percentage-point hike at its meeting next week and will likely follow that up with another hike of a similar size in March.
Some sectors of the economy showed signs of recession even though overall growth was positive. Housing in particular lagged, with building permits down 30% in December from a year ago and housing starts down 22%.
Fourth-quarter corporate earnings reports also signal a potential earnings recession. With nearly 20% of S&P 500 companies reporting, earnings are down 3% even with revenue growth of 4.1%, according to Refinitiv.
Consumer spending is also showing signs of weakening, with retail sales down 1.1% in December.
