US economy grows strongly in fourth quarter; weekly jobless claims fall

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 (GDP) increased at a 2.9 per cent annualised rate last quarter, the Commerce Department said in its advance fourth-quarter GDP growth estimate on Thursday (Jan 26). The economy grew at a 3.2 per cent pace in the third quarter. Economists polled by Reuters had forecast GDP rising at a 2.6 per cent rate.

That could be the last quarter of solid growth before the lagged effects of the Federal Reserve’s (Fed) 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 to 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 labour market remains strong, business sentiment continues to sour, which could eventually hurt hiring.

Robust second-half growth erased the 1.1 per cent contraction in the first six months of the year. For all for 2022, the economy expanded 2.1 per cent, down from the 5.9 per cent logged in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25 per cent-4.50 per cent 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 labour market resilience as well as excess savings accumulated during the Covid-19 pandemic.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

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 lustre as the fourth quarter ended.

ROLLING RECESSION

Despite the clear signs of a weak handover to 2023, some economists are cautiously optimistic that the economy will skirt an outright recession, but rather suffer a rolling downturn, where sectors decline in turn rather than all at once.

They argue that monetary policy now acts with a shorter lag than was previously the case because of advances in technology and the US central bank’s transparency, which they said resulted in financial markets and the real economy acting in anticipation of rate hikes.

Residential investment suffered its seventh straight quarterly decline, the longest such streak since the collapse of the housing bubble triggered the Great Recession, but there are signs the housing market could be stabilising.

Mortgage rates have been trending lower as the Fed slows the pace of its rate hikes.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 186,000 for the week ended Jan 21. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.675 million for the week ended 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 labour during the pandemic. REUTERS