The U.S. economy grew in the fourth quarter of 2022, finishing the year on a positive note despite negative growth in the year’s first half.
The gross domestic product (GDP) — a measure of economic activity created through the production of goods and services in the United States — increased at an annual rate of 2.9% in the fourth quarter of 2022, according to the “advance” estimate released by the Bureau of Economic Analysis (BEA) based on preliminary data.
This marks a slowdown from the 3.2% growth reported in the third quarter. The BEA’s advance estimate for Q3 had been 2.6%, the first bit of data suggesting the U.S. was steering away from a recession.
A recession is a trough in the business cycle indicated by two consecutive quarters of declining GDP, which the U.S. underwent in 2022. The first occurred in Q1, which saw GDP shrink by -1.6%, followed by Q2, which saw a retraction of -0.6%, according to historical GDP data.
The 2.9% rise in the Q4 GDP reflected increases in private inventory investment, consumer spending, federal government spending, state and local government spending, and nonresidential fixed investment, the BEA said in its report Thursday.
Even though the U.S. economy grew in the second half of 2022, the slower pace of growth, mixed with lower consumer spending, elevated inflation, and falling home prices, has some economists predicting a recessionary environment in the first half of 2023.
“The mix of growth was discouraging, and the monthly data suggests the economy lost momentum as the fourth quarter went on,” said Andrew Hunter, senior U.S. economist for Capital Economics. “We still expect the lagged impact of the surge in interest rates to push the economy into a mild recession in the first half of this year.”
Last year, the Federal Reserve embarked on its most aggressive spree of rate hikes since the early 1980s. The U.S. central bank increased the terminal rate from 0.00%-0.25% to 4.25%-4.5%, according to the Federal Funds Chart provided by the Federal Reserve Bank of New York.
The Federal Reserve is forecasted to slow rate hikes in 2023, with expectations that the terminal rate will plateau around 5%-5.25% before the Federal Reserve board pauses to evaluate the economic impact, according to the Summary of Economic Projections for the Fed Funds Rate.
The Fed’s goal with such extreme rate hikes has been to trigger broad spending cuts and job losses in an effort to crush the rapid pace of inflation, which peaked at 9.1% in June 2022.
“Headwinds from the big jump in interest rates, consumers cutting back on discretionary spending, and weak economies overseas were big problems for the U.S. in late 2022,” said Bill Adams, chief economist for Comerica Bank. “I expect real GDP growth will likely turn negative in the first half of this year.”
Federal Reserve members will convene from January 31 to February 1 for the year’s first scheduled Federal Open Market Committee (FOMC) meeting, where officials will likely issue a 25 basis point rate hike.
The second estimate for the fourth quarter, based on more complete data, will be released on February 23, 2023.