US economy likely slowed but still posted solid growth in Q4

Despite a likely second straight quarter of expansion, the economy is widely expected to slow and then slide into a recession sometime in the coming months.
Image for representational purpose. (File Photo | AP)
Image for representational purpose. (File Photo | AP)

WASHINGTON: The U.S. economy likely rolled out of 2022 with momentum, registering decent growth in the face of painful inflation, high-interest rates and rising concern that a recession may be months away.

Economists have estimated that the gross domestic product — the broadest measure of economic output — grew at a 2.3 per cent annual pace from October through December, according to a survey of forecasters by the data firm FactSet. The Commerce Department will issue its first of three estimates of fourth-quarter GDP growth at 8:30 a.m. Eastern time Thursday.

Despite a likely second straight quarter of expansion, the economy is widely expected to slow and then slide into a recession sometime in the coming months as increasingly high-interest rates, engineered by the Federal Reserve, take a toll. The Fed's rate hikes have inflated borrowing costs for consumers and businesses, from mortgages to auto loans to corporate credit.

The housing market, which is especially vulnerable to higher loan rates, has been badly bruised: Sales of existing homes have dropped for 11 straight months. Investment in housing plunged at a 27 per cent annual rate from July through September. And consumer spending, which fuels roughly 70 per cent of the entire economy, is likely to soften in the months ahead, along with the still-robust job market.

The resilience of the labour market has been a major surprise. Last year, employers added 4.5 million jobs, second only to the 6.7 million that were added in 2021 in government records going back to 1940. And last month's unemployment rate, 3.5 per cent, matched a 53-year low.

But the good times for America's workers aren't likely to last. As higher rates make borrowing and spending increasingly expensive across the economy, many consumers will spend less and employers will likely hire less.

Last year, the Fed raised its benchmark rate seven times in unusually large increments to try to curb the spike in consumer prices. Yet another Fed rate hike, though a smaller one, is expected next week.

The central bank has been responding to an inflation rate that remains stubbornly high even though it has been gradually easing. Year-over-year inflation was raging at a 9.1 per cent rate in June, the highest level in more than 40 years. It has since cooled — to 6.5 per cent in December — but is still far above the Fed's 2 per cent annual target.

Another threat to the economy this year is rooted in politics: House Republicans could refuse to raise the federal debt limit if the Biden administration rejects their demand for broad spending cuts. A failure to raise the borrowing cap would prevent the federal government from being able to pay all its obligations and could shatter its credit.

Moody's Analytics estimates that the resulting upheaval could wipe out nearly 6 million American jobs in a recession similar to the devastating one that was triggered by the 2007-2009 financial crisis.

At least the economy is likely beginning the year on firmer footing than it did at the start of 2022. Last year, the economy shrank at an annual pace of 1.6 per cent from January through March and by a further 0.6 per cent from April through June. Those two consecutive quarters of economic contraction raised fears that a recession might have begun.

But the economy regained strength over the summer, propelled by resilient consumer spending and higher exports. It expanded at an unexpectedly strong 3.2 per cent annual pace from July through September.

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The New Indian Express
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