Final fourth quarter GDP estimate confirms slowdown in economic growth

The third and final estimate for real gross domestic product (GDP) in the fourth quarter of 2022 showed that U.S. economic growth is decelerating, according to the Bureau of Economic Analysis (BEA). 

GDP increased at an annual rate of 2.6% in the fourth quarter of 2022 after rising 3.2% in the third quarter, according to the third and final estimate from the BEA. 

The slowdown was primarily due to a downturn in exports and a retraction in consumer spending, nonresidential fixed investment and state and local government spending, the BEA said. This was offset by increases in private inventory investment, a smaller decrease in residential fixed investment and an uptick in federal government spending.  

Thursday’s GDP estimate was based on more complete data than what was previously available. The reading comes below the BEA’s original GDP estimate for the fourth quarter, which indicated the economy increased at a rate of 2.9%. 

“While today’s report provides an additional degree of clarity about the recent past, attention has already turned to more timely indications of the relative state of the economy today,” Jim Baird, Plante Moran Financial Advisors chief investment officer, said in a statement. “The forecast range varies but has generally improved since the beginning of the year, with growth expected to remain solidly positive.

“The Atlanta Fed’s GDPNow indicator projects Q1 growth to reach 3.2%, although its estimates can swing significantly and has materially missed the mark at times,” Baird continued.

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The credit crunch could limit growth

Growth in the second half of 2022 has helped to quell recession fears after two quarters of negative growth in the first half of 2022, but there are signs that all is not well, according to Baird. 

“Recent turmoil in the banking sector is sparking a resurgence in concern about an economy that is feeling the weight of high inflation and a Fed that is firmly focused on reining it in,” Baird said. “On the heels of multiple bank failures and other institutions coming under pressure earlier this month, questions persist about the strength of bank balance sheets and the impact of depositor outflows on their ability and appetite to continue to extend credit.

“A more pronounced and extended reduction in the flow of credit would be another significant headwind to growth,” Baird continued.

The Federal Reserve raised interest rates 25 basis points at its most recent meeting, defying economists’ predictions that it would pause its monetary policy in response to the failures of Silicon Valley Bank (SVB) and Signature Bank. 

Fed chair Jerome Powell reiterated the central bank’s commitment to rein in inflation but said, “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”  

Powell also acknowledged that the events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which could impact economic outcomes. 

February’s Consumer Price Index (CPI), a measure of inflation, came in at 6%, showing that inflation is moderating since hitting a record high last June. 

“The U.S. economic expansion was fueled by a resilient consumer,” Morning Consult analyst Jesse Wheeler said. “However, the increase in consumer spending in Q4 was revised down to 1.0% from 1.4% previously, and higher prices, higher interest rates and tighter credit conditions on the back of the recent banking crisis are all expected to take their toll on consumption and investment moving into the rest of 2023.”

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Recession remains a risk  

The banking sector crisis has sparked concerns over whether the Fed can beat inflation with its restrictive monetary policy while providing liquidity to banks that need it to mitigate the risk of further fallout.  

These cracks emerging in the banking system may be what finally pushes the economy into a recession, according to Fannie Mae.

“Inflation has now been joined by financial stability concerns as threats to sustained growth,” Fannie Mae’s Senior Vice President and Chief Economist Doug Duncan said in a statement. “These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022.

“While housing writ large has responded to the Fed’s monetary tightening in a relatively predictable fashion, the rapid uptick in home sales in response to modest rate declines earlier this year corroborates our long-standing expectation that the housing sector will help moderate any future recession due to the significant pent-up demand,” Duncan continued.

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