US economy expands at    healthy clip but slowdown signs mount

Inflation and higher borrowing costs points to a tenuous outlook for the economy

Economists see the economy shrinking in the second and third quarters, putting 65% odds on a recession in the coming year.

The US economy expanded at a healthy pace in the fourth quarter, though signs of slowing underlying demand mounted as the steepest interest-rate hikes in decades threaten growth this year.

GDP increased at a 2.9% annualised rate in the final three months of 2022 after a 3.2% gain in the third quarter, the US Commerce Department’s initial estimate showed. Personal consumption, the biggest part of the economy, climbed at a below-forecast 2.1% pace.

About half of the GDP increase reflected inventory growth, while government spending matched the biggest gain since early 2021. 

The report also showed some signs of stress for American consumers, whose wages have failed to keep up with inflation and continued to encourage them to draw down savings accumulated from government pandemic-relief programmes. 

The burden of elevated prices and higher borrowing costs is mounting, pointing to a tenuous outlook for the economy. A key gauge of underlying demand that strips out the trade and inventories components — inflation-adjusted final sales to domestic purchasers — rose an annualised 0.8% in the fourth quarter after a 1.5% gain.

The latest Bloomberg monthly survey shows economists see the economy shrinking in the second and third quarters, putting 65% odds on a recession in the coming year.

Recent data show cracks are developing more broadly. Retail and motor vehicle sales data showed households are starting to retrench, the housing market continues to weaken and some businesses are reconsidering capital spending plans.

As the US Federal Reserve continues to hike interest rates to ensure inflation is extinguished, housing and manufacturing have deteriorated quickly, while industries including banking and technology are carrying out mass layoffs.

The GDP report showed the personal consumption expenditures price index, a key inflation metric for the Fed, rose at an annualised 3.2% rate in the fourth quarter, down from a 4.3% pace in the prior three months. 

The core index that excludes food and energy climbed at a 3.9% rate compared with 4.7% paces in the prior two quarters. 

The moderation in price pressures is consistent with forecasts that the Fed will further scale back its tightening campaign next week, when it is expected to raise rates by 25 basis points. Policymakers boosted the benchmark rate by 50 points in December after 75 basis-point hikes at their previous four meetings. 

The world’s largest economy expanded 2.1% last year. In 2021, when demand snapped back from pandemic-related shutdowns, the economy grew 5.9% — the best performance since 1984.

The GDP data showed services spending increased at 2.6% annualised rate in the October-December period, the slowest since last year’s first quarter.

• Bloomberg