WASHINGTON, Jan 26 (Reuters) – The U.S. economy likely maintained a strong pace of growth in the fourth quarter as consumers boosted spending on goods, but momentum appeared to have slowed sharply by year-end as rising interest rates eroded demand.
The Commerce Department’s fourth-quarter gross domestic product forecast on Thursday could mark the last quarter of solid growth before the lag effects of the Fed’s fastest monetary policy tightening cycle since the 1980s kick in. Most economists expect a recession by the second half of the year, albeit a mild one compared with previous downturns.
Retail sales have fallen sharply over the past two months, and manufacturing appears to be joining the housing market in the recession. While the labor market remains strong, business confidence continues to deteriorate, which could ultimately affect hiring.
“This looks like it might be the last really positive, strong quarter that we’ve seen in a while,” said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. Study the numbers. Recent data suggest economic momentum is continuing to slow.”
Gross domestic product probably expanded at an annualized rate of 2.6% last quarter after accelerating at a 3.2% pace in the third quarter, according to a Reuters poll of economists. Estimates range from 1.1% to 3.7%.
Strong second-half growth will erase a 1.1 percent contraction in the first six months of the year.
Growth for the full year is expected to be around 2.1%, down from 5.9% in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a range of 4.25%-4.50%, the highest on record since late 2007.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to grow at a faster pace than the 2.3% pace in the third quarter. This mostly reflected a surge in spending on goods earlier in the quarter.
Resilience in the labor market and excess savings accumulated during the COVID-19 pandemic supported spending. But demand for durable manufactured goods, bought mostly on credit, has weakened, and some households, especially low-income ones, have depleted their savings.
Growth was also likely boosted by business spending on equipment, intellectual property and nonresidential structures. But business spending also lost some of its luster towards the end of the fourth quarter as demand for goods slumped.
Despite clear signs of a weak transition through 2023, some economists are cautiously optimistic that the economy will avoid an outright recession and instead experience a rolling downturn in which sectors decline sequentially rather than all at once.
rolling recession
They argue that monetary policy now has a shorter lag than before, thanks to technological advances and the transparency of the U.S. central bank, which they say leads financial markets and the real economy to expect rate hikes.
“We will continue to have positive GDP numbers,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles. “The reason is that sectors are falling in turn, not all at once. The rolling recession started with housing and now we’re seeing the next phase related to consumption.”
In fact, factory production has fallen sharply for two straight months as demand for goods slumps. Layoffs in the tech sector are also seen as a signal of cuts in corporate capital spending.
While residential investment is likely to decline for a seventh straight quarter, which would be the longest stretch since the housing bubble burst that triggered the Great Recession, there are signs the housing market may be stabilizing. Mortgage rates have been trending lower as the Federal Reserve has slowed its pace of rate hikes.
The buildup of inventories boosted GDP last quarter, but as demand slows, businesses are likely to focus on reducing inventories in warehouses rather than placing new orders, weakening growth in coming quarters.
Trade, which accounted for the bulk of GDP growth in the third quarter, is considered to have contributed little or less to GDP growth. Government spending is expected to grow strongly.
While the labor market has shown remarkable resilience so far, economists believe deteriorating business conditions will force companies to slow hiring and lay off workers.
Companies outside the technology sector and rate-sensitive sectors such as housing and finance are hoarding workers after struggling to find labor during the pandemic.
A separate report from the Labor Department on Thursday is likely to show initial claims for state unemployment benefits rose to a seasonally adjusted 205,000 for the week ended Jan. 1. It was 190,000 the previous week, according to a Reuters poll of economists.
“We expect initial jobless claims to eventually start to pick up after a recent decline, consistent with an eventual decline in employment and a rise in the unemployment rate,” said Kevin Cummins, chief economist at NatWest Markets in Stamford, Connecticut. We expect spending to moderate as consumers will be less inclined to reduce their savings in the face of a deteriorating labor market.”
Reporting by Lucia Mutikani; Editing by Andrea Ricci
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