Strong US economic growth is expected in the fourth quarter, and the outlook is bleaker. Reuters


© Reuters. FILE PHOTO: A man walks in the rain with his shopping bag during the holiday season in New York, U.S., December 15, 2022. REUTERS/Eduardo Munoz

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy likely maintained a strong pace of growth in the fourth quarter as consumers increased spending on goods, but momentum appeared to have slowed considerably late in the year, with higher interest rates dampening demand.

The Commerce Department’s advanced fourth-quarter gross domestic product report on Thursday could mark the last quarter of solid growth before the lingering effects of the Federal Reserve’s fastest tightening cycle since the 1980s begin. Most economists expect a recession by the second half of the year, albeit a mild one compared to previous declines.

Retail sales have weakened sharply over the past two months, and manufacturing appears to have joined the housing market in recession. While the labor market remains strong, business sentiment continues to deteriorate, which could ultimately hurt hiring.

“It looks like this might be the last really positive, strong quarterly release that we’re going to see for a while,” said Sam Bullard, senior economist at Wells Fargo (NYSE:) Securities in Charlotte, North Carolina. “Markets and most people will skim this number. Recent data suggests economic momentum continues to slow.”

According to a Reuters survey of economists, GDP growth likely rose at a 2.6% annual rate in the latest quarter after accelerating to 3.2% in the third quarter. Estimates ranged from a 1.1% to 3.7% pace.

Strong growth in the second half of the year would erase a 1.1% contraction in the first six months of the year.

Growth for the full year is expected to be around 2.1%, down from the 5.9% recorded in 2021. The Fed last year raised its benchmark rate by 425 basis points from near zero to a range of 4.25%-4, 50%, which is the highest since the end of 2007.

Consumer spending, which accounts for more than two-thirds of US economic activity, is expected to grow faster than the 2.3% rate recorded in the third quarter. This would mainly reflect the increase in commodity consumption at the beginning of the quarter.

Consumption is supported by the resilience of the labor market, as well as excess savings accumulated during the COVID-19 pandemic. But demand for durable manufactured goods, which are mostly bought on credit, has disappeared, and some households, especially those with lower incomes, have depleted their savings.

Economic growth has likely also been fueled by increased business spending on equipment, intellectual property and non-residential structures. But as demand for goods fell, business spending also lost its luster as the fourth quarter ended.

Despite clear signs of a weak transition to 2023, some economists are cautiously optimistic that the economy will avoid a full-blown recession, but instead experience a steady decline, where sectors fall in turn, rather than all at once.

ROLLING RECESSION

They argue that monetary policy now operates with a shorter delay than previously because of advances in technology and the transparency of the U.S. central bank, which they say has resulted in financial markets and the real economy operating in anticipation of rising interest rates.

“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 the sectors fall alternately, not simultaneously. The recession started with housing and now we are seeing the next phase which is about consumption.”

Indeed, with demand for goods falling, factory output fell sharply for two months in a row. Job cuts in the technology industry have also been seen as a significant reduction in capital spending by businesses.

Although housing investment likely suffered a seventh quarterly decline, which would be the longest streak since the collapse of the housing bubble that sparked the Great Recession, there are signs that the housing market may be stabilizing. Mortgage rates are trending lower as the Fed slows the pace of rate hikes.

Inventory accumulation was seen as a contributor to GDP last quarter, but with demand slowing, companies are likely to focus on reducing inventory in their warehouses instead of placing new orders, undermining growth in the coming quarters.

Trade, which accounted for the bulk of GDP growth in the third quarter, was seen as contributing little or detracting from GDP growth. Strong growth in government spending is expected.

Although the labor market has so far shown remarkable resilience, economists argue that deteriorating business conditions will force companies to slow hiring and lay off workers.

Companies outside the tech industry, as well as interest rate-sensitive sectors such as housing and finance, are piling on workers after struggling to find labor during the pandemic.

A separate Labor Department report on Thursday is likely to show that initial claims for state jobless benefits rose to a seasonally adjusted 205,000 for the week ended Jan. 21, from 190,000 the previous week, according to a Reuters poll of economists.

“We expect initial jobless claims to eventually begin to pick up after their recent decline, in line with the eventual decline in payrolls and an increase in the unemployment rate,” said Kevin Cummins (NYSE: ), chief economist at NatWest Markets in Stamford, Connecticut. “In turn, we expect spending to slow as consumers will be less willing to reduce savings in the face of a worsening labor market.”

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