US Economy Grows More Than Expected, Soothing Recession Fears

GDP expanded at an annualized 2.9% pace in the fourth quarter, exceeding projections of 2.6%

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The U.S. economy grew faster than expected in the fourth quarter, led by resilient consumer spending and a tight labor market, suggesting that the nation hasn’t entered a recession.

Gross domestic product (GDP) grew by an annualized 2.9%, exceeding estimates of 2.6%, although the pace lagged the third quarter’s 3.2% increase, the Bureau of Economic Analysis (BEA) said on Thursday. For all of 2022, GDP expanded 2.1%, dragged down by two consecutive quarterly declines in the first half of the year. That’s down from 5.9% in 2021, when the economy rebounded from the pandemic.

Key Takeaways

  • U.S. GDP grew at a 2.9% annualized rate in the fourth quarter of 2022, exceeding projections of 2.6% but decelerating from a 3.2% gain in the third quarter
  • For the entirety of 2022, GDP expanded 2.1%, decelerating from a 5.9% growth rate in 2021 when the economy rebounded from pandemic-related declines
  • Consumer spending, which accounts for over two-thirds of GDP, was one of the main drivers of growth last quarter, offsetting declines in residential investment that dragged growth lower
  • The stronger-than-expected GDP report could prompt Fed officials to consider a more hawkish policy stance ahead of next week’s meeting of the Federal Open Market Committee (FOMC)

GDP is composed of factors that include consumer spending, government expenditures, fixed investment, business inventories, and net exports. Consumer spending, which accounts for almost 70% of the total, rose 2.1% from the previous quarter. Other contributors included private inventory investment, nonresidential fixed investment, and government spending at the federal, state, and local level. Gains were partly offset by declines in residential fixed investment, which tracks the construction and sale of new homes, as a slowdown in the housing market deepened.

Implications for Fed Policy

The stronger-than-forecast GDP report could prompt Fed officials to adopt a more hawkish monetary policy stance ahead of next week’s meeting of the Federal Open Market Committee (FOMC). Fed officials have penciled in two more rate hikes of 25 basis points each at the next two meetings of the FOMC, with the possibility of a third rate hike of equal magnitude in May, according to the CME Group’s FedWatch Tool. That would result in a terminal fed funds rate between 5% and 5.25%.

Article Sources
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  1. Bureau of Economic Analysis (BEA). “Gross Domestic Product, Fourth Quarter and Year 2022 (Advance Estimate).

  2. CME Group. “CME FedWatch Tool: Target Rate Probabilities for May 3, 2023 Fed Meeting.”

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