US economy grows strongly but interest rate rises starting to slow momentum
The US economy maintained a strong pace of growth in the fourth quarter as consumers boosted spending on goods, but momentum appears to have slowed considerably towards the end of the year, with higher interest rates eroding demand.
Gross domestic product – the broadest measure of economic health – increased at a 2.9% annualized rate last quarter, the commerce department said in its advance fourth-quarter GDP growth estimate on Thursday. The economy grew at a 3.2% pace in the third quarter. Economists polled by Reuters had forecast GDP rising at a 2.6% rate.
That could be the last quarter of solid growth before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s kick in. Most economists expect a recession by the second half of the year, though mild compared with previous downturns.
Retail sales have weakened sharply over the last two months and manufacturing looks to have joined the housing market in recession. While the labor market remains strong, business sentiment continues to sour, which could eventually hurt hiring.
Robust second-half growth erased the 1.1% contraction in the first six months of the year. For all for 2022, the economy expanded 2.1%, down from the 5.9% logged in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.
Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth, mostly reflecting a surge in goods spending at the start of the quarter. Spending has been underpinned by labor market resilience as well as excess savings accumulated during the Covid-19 pandemic.
But demand for long-lasting manufactured goods, which are mostly bought on credit, has fizzled and some households, especially lower-income, have depleted their savings. Business spending also lost some luster as the fourth quarter ended.