- Q4 GDP is expected to grow 2.6%
- Seeing strong consumer spending; other sectors to contribute
- Weekly jobless claims are likely to rise moderately
WASHINGTON, Jan 26 (Reuters) – The US economy likely maintained its strong pace of growth in the fourth quarter as consumers boosted spending on goods, but momentum appears to have slowed significantly towards the end of the year as higher interest rates weigh on demand .
The Commerce Department’s fourth-quarter gross domestic product advance report could mark the last quarter of solid growth before the lagged effects of the Federal Reserve’s fastest tightening cycle since the 1980s. Most economists expect a recession in the second half of the year, albeit mild compared to previous downturns.
Retail sales have weakened sharply over the past two months and manufacturing appears to have joined the housing market in the recession. While the job market remains strong, business sentiment continues to deteriorate, which could ultimately affect hiring rates.
“This looks like this could be the last really positive, strong quarterly print we’re going to see for a while,” said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Markets, and most people, will go through this number. More recent data suggests that economic momentum is continuing to slow.”
According to a Reuters poll of economists, GDP growth likely rose by an annualized 2.6% in the most recent quarter, after accelerating 3.2% in the third quarter. Estimates ranged from 1.1% to 3.7%.
Robust growth in H2 would offset the 1.1% decline in the first six months of the year.
Full-year growth is expected to be around 2.1%, up from 5.9% in 2021. The Fed raised interest rates by 425 basis points from near zero to a range of 4.25% to 4.50 last year %, the highest since late 2007.
Consumer spending, which accounts for more than two-thirds of US economic activity, is expected to have grown faster than the 2.3% rate recorded in the third quarter. This would mainly reflect an increase in merchandise spending earlier in the quarter.
Spending has been supported by job market resilience as well as excess savings accumulated during the COVID-19 pandemic. But demand for durable manufactured goods, mostly bought on credit, has stalled and some households, especially low-income ones, have drained their savings.
Economic growth also likely received a boost from corporate spending on equipment, intellectual property and non-residential buildings. But with falling demand for goods, corporate spending also lost some of its luster at the end of the fourth quarter.
Despite clear signs of a sluggish transition into 2023, some economists are cautiously optimistic that the economy will avoid an outright recession, but rather suffer a rolling downturn, with sectors declining sequentially rather than all at once.
They argue that advances in technology and the transparency of the Federal Reserve mean that monetary policy is now acting with less lag than before, which they say has caused financial markets and the real economy to act in anticipation of rate hikes.
“We will continue to have positive GDP numbers,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. “The reason for this is that the sectors take turns falling and not falling at the same time. The rolling recession started with housing and now we are seeing the next phase, which is related to consumption.”
Indeed, factory output has fallen sharply for two straight months as demand for goods has collapsed. The job cuts in the technology sector were also seen as a flagging cut in corporate capital spending.
While home investment is likely to have suffered its seventh straight quarterly decline, which would be the longest of its kind since the housing bubble collapse that triggered the Great Recession, there are signs the housing market may be stabilizing. Mortgage rates are trending down as the Fed slows the rate of hikes.
Inventory build-up helped GDP last quarter, but as demand slows, companies are likely to focus on reducing inventories rather than placing new orders, which would undermine growth in the coming quarters.
Trade, which accounted for the bulk of GDP growth in the third quarter, either made a small contribution or detracted from GDP growth. Strong growth is expected from government spending.
While the job market has shown remarkably resilient so far, economists argue that deteriorating business conditions will force companies to hire fewer and lay off workers.
Companies outside of tech, as well as interest-rate-sensitive sectors like housing and finance, hoarded labor after struggling to find workers during the pandemic.
According to a Reuters poll of economists, a separate Labor Department report on Thursday is likely to show that initial jobless claims rose to a seasonally adjusted 205,000 for the week ended January 21, from 190,000 the previous week.
“We expect that initial jobless claims will eventually pick up again after their recent decline, along with an eventual decline in payrolls and a rise in the unemployment rate,” said Kevin Cummins, chief economist at NatWest Markets in Stamford, Connecticut . “In turn, we expect spending to slow as consumers become less willing to shed savings amid a deteriorating job market.”
Reporting by Lucia Mutikani; Editing by Andrea Ricci
Our standards: The Thomson Reuters Trust Principles.