(CTN NEWS) – Despite the pressure of rising interest rates and widespread concerns about an impending recession, the U.S. economy grew at a 2.9% annual rate from October through December, finishing 2022 with momentum.
According to the estimate released by the Commerce Department on Thursday, the country’s gross domestic product, which is the most comprehensive indicator of economic production.
Slowed down in the third quarter from the 3.2% annual growth rate it had registered from July through September.
Most economists predict the economy will continue to slow down in the upcoming quarter and enter at least a moderate recession by midyear.
Consumer spending remained strong last quarter, and firms replenished their supply chains. Spending by the federal government also increased GDP.
However, due to rising mortgage rates, which are undermining the residential real estate market, investment in housing fell for a second consecutive quarter at a 27% annual pace.
After increasing by 5.9% in 2021, the GDP will increase by 2.1% overall in 2022.
The Federal Reserve’s aggressive rate rises is meant to result in the economy’s anticipated downturn in the coming months.
The Fed’s rate increases are intended to slow growth, restrain spending, and terminate the biggest inflationary wave in four decades.
The Fed increased its target rate seven times in the previous year. It is anticipated to do so once more the following week, albeit by a lower margin.
It has come as a great shock how resilient the American labor market has been.
According to federal data dating back to 1940, employers added 4.5 million employment last year, which was second only to the 6.7 million jobs added in 2021.
And the 3.5% unemployment rate in the previous month matched a 53-year low.
Regarding Thursday’s GDP report, President Joe Biden said, “The news couldn’t have been much better.” “We are taking the appropriate direction. We must now safeguard those advantages.:
However, it is unlikely that the good times for American workers will persist. Many individuals will cut down on their spending, and firms will probably hire fewer people as higher rates make borrowing and spending more expensive across the economy.
In a research paper, High-Frequency Economics’ principal U.S. economist Rubeela Farooqi stated that “recent statistics show that the pace of expansion could drop considerably in (the current quarter) as the impacts of restrictive monetary policy take root.”
A desired slowdown in the economy will be good news, according to the Fed.
About 70% of the economy is driven by consumer spending, which increased at a solid 2.1% annual rate from October through December, slightly less than the previous quarter’s 2.3% growth.
More recent data, such as a 1.1% decline in retail sales last month, show that consumer spending has started to slow.
“That signals higher rates were starting to have a bigger toll and lays the ground for weaker growth in the first quarter of this year,” said Andrew Hunter, senior U.S. economist at Capital Economics.
Bank of America economists predict that growth will slow to a 1.5% annual pace in the quarter that runs from January through March and then decline for the remainder of the year.
Declining by 0.5% in the second quarter, 2% in the third, and 1.5% in the fourth.
The Fed has been acting in response to inflation that has been progressively declining but has remained persistently high.
Inflation over the previous year raged at 9.1% in June, the highest level in more than 40 years. It has now dropped to 6.5% in December but is still far higher than the Fed’s yearly target of 2%.
Sal Guatieri, the senior economist at BMO Capital Economics, said: “The U.S. economy isn’t plummeting off a cliff, but it is losing vigour and risks contracting early this year.”
That should restrict future rate hikes by the Fed to two modest increases.
Politics also threaten the economy this year: if the Biden administration rejects House Republicans’ demands for significant spending cutbacks, they might refuse to increase the debt ceiling.
If the borrowing limit isn’t increased, the federal government won’t be able to cover all of its debts, which could ruin its reputation.
According to Moody’s Analytics, the ensuing instability might lead to the loss of close to 6 million American jobs in a devastating recession like the one brought on by the 2007–2009 financial crisis.
At least, the economy is probably starting the year on more stable ground than at the beginning of 2022.
From January through March of last year, the GDP declined by 1.6% annually and another 0.6% from April to June. Fears that a recession may have started arose from those two consecutive quarters of economic downturn.
According to data source FactSet, nearly half of the S&P 500 businesses mentioned a “recession” during corporate earnings calls for the April-June quarter of 2022.
But over the summer, the economy recovered its strength thanks to strong consumer spending and increasing exports.
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