WASHINGTON, Jan 26 (Reuters) – The U.S. economy maintained a strong growth pace in the fourth quarter as consumers increased spending on goods, but the pace slowed significantly towards the end of the year as higher interest rates dampened demand.
The Commerce Department’s preliminary fourth-quarter gross domestic product report on Thursday may mark the last quarter of solid growth before the lingering effects of the central bank’s fast monetary policy tightening cycle since the 1980s. Most economists expect a slowdown in the second half. Compared to previous declines, the year was mild.
Retail sales have weakened sharply in the past two months and the manufacturing sector has joined the housing market in the slowdown. While the labor market remains strong, business sentiment continues to be sour, which could eventually hurt hiring.
“This is probably the last positive, strong quarterly print,” said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. “The markets and most people will see this number. Recent data suggest that economic momentum continues to slow.”
GDP growth may have increased at an annual rate of 2.6% last quarter after accelerating to a 3.2% pace in the third quarter, according to a Reuters poll of economists. Estimates ranged from a 1.1% rate to a 3.7% pace.
Strong second-half growth will erase the 1.1% contraction in the first six months of the year.
Full-year growth is expected to be around 2.1% from 5.9% recorded in 2021. Last year the central bank raised its policy rate by 425 basis points from near zero to a range of 4.25%-4.50%. Since late 2007.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to grow faster than the 2.3% rate set in the third quarter. This will most likely reflect a surge in commodity costs at the start of the quarter.
Spending is supported by labor market resilience and excess savings accumulated during the COVID-19 pandemic. But demand for durable goods is often bought on credit, and some households, especially low-income ones, are reducing their savings.
Economic growth can also be boosted from business spending on equipment, intellectual property and non-residential structures. But business spending also lost some of its luster as the fourth quarter ended, buoyed by demand for goods.
Despite clear signs of a weaker handover to 2023, some economists are cautiously optimistic that the economy will avoid an outright recession, but instead experience a rolling decline, where sectors all fall at once.
Rolling recession
They argue that due to advances in technology and the openness of the U.S. Federal Reserve, monetary policy now operates with less leverage than in the past, resulting in financial markets and the real economy acting in anticipation of rate hikes.
“We will continue to have positive GDP numbers,” said Chung Won Son, a professor of finance and economics at Loyola Marymount University in Los Angeles. The rolling recession started with housing, and now we’re looking at the next phase related to consumption.”
In fact, factory production has fallen sharply for two months as demand for goods slows. Job cuts in the tech sector have also seen drastic cuts in capital spending by businesses.
Although residential investment suffered its seventh straight quarterly decline, the longest such streak since the collapse of the housing bubble sparked the Great Depression, there are signs the housing market is stabilizing. Mortgage rates are lower as the central bank slows the pace of its rate hikes.
Inventory accumulation added to GDP last quarter, but as demand slowed, businesses focused on reducing their inventory rather than placing new orders, slowing growth in the quarters.
Trade made a small contribution to the bulk of GDP growth in the third quarter, or subtracted from GDP growth. Stronger growth is expected from government spending.
Although the labor market has so far shown significant resilience, worsening business conditions will slow firms’ hiring and force them to lay off workers, economists argue.
Companies outside the technology sector and interest rate-sensitive sectors such as housing and finance are hoarding workers after struggling to find workers during the pandemic.
A separate report from the Labor Department on Thursday showed that initial claims for state jobless benefits rose to a seasonally adjusted 205,000 in the week ended Jan. 21, from 190,000 in the previous week, according to a Reuters poll of economists.
“We expect initial jobless claims to rebound after the recent decline,” said Kevin Cummins, chief economist at NatWest Markets in Stamford, Connecticut. “In turn, we expect spending to ease as consumers are unwilling to cut back on savings in the face of a poor labor market.”
Report by Lucia Muticani; Editing by Andrea Ricci
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