US economy grows strongly in Q4; unemployment claims fall

The US economy maintained a strong pace of growth in the fourth quarter as consumers increased spending on goods, but momentum appears to have slowed considerably towards the end of the year as higher interest rates erode demand.

The Gross Domestic Product grew at an annualized rate of 2.9% in the last quarter, said the Department of Commerce in its first estimate this Thursday (26), against expansion of 3.2% in the third quarter.

Economists polled by Reuters projected GDP expansion at a rate of 2.6%.

That could mark the last quarter of solid growth before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s.

Most economists expect a recession by the second half of the year, albeit a mild one compared to previous recessions.

Retail sales have weakened sharply over the past two months and manufacturing appears to have joined the housing market in a downturn. While the job market remains strong, business sentiment remains sour, which could eventually hurt hiring.

Robust growth in the second half erased the 1.1% contraction in the first six months of the year. In 2022 as a whole, the economy expanded by 2.1%, down from the 5.9% recorded in 2021.

Last year, the Fed raised its interest rate by 425 basis points from almost zero to a range of 4.25%-4.50%, the highest since late 2007.

Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth, primarily reflecting an increase in spending on goods earlier in the quarter. Spending was supported by the resilience of the labor market, 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 cooled and some households, especially low-income ones, have run out of savings. Business spending also lost steam at the end of the fourth quarter.

ONGOING RECESSION

Despite clear signs of a weak carry-over to 2023, some economists are cautiously optimistic that the economy will avoid a recession and instead suffer an ongoing downturn, with sectors taking turns in their downturns rather than contracting all at once. Same time.

They argue that monetary policy now acts with a shorter delay than previously due to technological advances and the transparency of the US central bank, which they say has prompted financial markets and the real economy to act in anticipation of interest rate hikes.

Residential investment suffered its seventh consecutive quarterly decline, the longest period since the collapse of the housing bubble triggered by the Great Recession, but there are signs that the housing market may be stabilizing.

Mortgage rates have been easing as the Fed slows the pace of rate hikes.

A separate Labor Department report also showed that initial jobless claims fell by 6,000 to 186,000 in the week ended Jan. 21.