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The US economy maintained a strong pace of growth in the fourth quarter as consumers increased spending on goods, but the pace appears to have slowed significantly towards the end of the year, dampening demand for higher interest rates.
Gross domestic product grew at a 2.9% annual rate last quarter, the Commerce Department said in its advance fourth-quarter GDP growth forecast for January 26, 2023. The economy grew at a pace of 3.2% in the third quarter. economists polled reuters The GDP was projected to grow at a rate of 2.6%.
This could be the last quarter of solid growth before the backward effects of the Federal Reserve’s sharpest monetary policy tightening cycle since the 1980s kick in. Most economists expect a recession in the second half of the year, although it is milder than previous recessions.
Retail sales have weakened sharply over the past two months and the housing market has joined the manufacturing slump. While the labor market remains strong, business sentiment remains sour, which could ultimately hurt hiring.
Strong second-half growth erased a 1.1% contraction in the first six months of the year. For all of 2022, the economy is projected to expand by 2.1%, down from the 5.9% logged in 2021. The Fed last year raised its policy rate by 425 basis points from zero to a range of 4.25%-4.50%, the most since 2007.
Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth, mostly reflecting an increase in merchandise spending at the start of the quarter. Spending has been underpinned by the flexibility of the labor market as well as additional savings accumulated during the COVID-19 pandemic.
But demand for long-lasting manufactured goods, which are mostly bought on credit, has shrunk and some households, especially those with low incomes, have depleted their savings. Business expenses also decreased somewhat as the fourth quarter ended.
ongoing recession
Despite clear signs of a waning handover by 2023, some economists are cautiously optimistic that the economy will avoid a full recession, but instead face a rolling recession, where all sectors decline instead of at once. comes
They argue that due to advances in technology and the transparency of the US central bank, monetary policy now operates with less lag than in the past, resulting in financial markets and the real economy acting in anticipation of rate hikes.
Residential investment suffered a seventh consecutive quarter of declines, the longest such streak since the collapse of the housing bubble that led to the Great Recession, but there are signs the housing market may be stabilizing.
Mortgage rates have been trending down as the Fed has slowed the pace of its rate hikes.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits declined by 6,000 to a seasonally-adjusted 186,000 for the week ending January 21. The number of people receiving benefits has increased after the initial week of assistance. 20,000 to 1.675 million for the week ending Jan 14.
Companies outside the technology industry as well as interest rate sensitive sectors like housing and finance are hoarding workers after struggling to find labor during the pandemic.