Fourth quarter GDP grew more than expected
The release of the first formal report on Q4 GDP proved to be moderately better than anticipated, coming in at 2.9% to close out 2022. The consensus forecast had been for a 2.6% annualized quarter- over-quarter gain. The report capped a tumultuous year for GDP as a measure of the economy’s strength, one in which the published headline results weren’t terribly indicative of the underlying growth trend over time.
The first half of the year brought two consecutive negative quarters for GDP — a technically incorrect but commonly utilized rule of thumb for recession. The second half of the year showed a marked reversal in top-line growth, which averaged about 3% from July through December. Arguably, neither provided an accurate depiction of the underlying trend within the economy.
Distortions in the data played a meaningful role, as global supply chains were unkinked, and the flow of goods improved. In the first half of the year, that led to a flood of backlogged inbound goods that weighed heavily on top-line growth. In the first quarter alone, that dynamic shaved over 3 percentage points off GDP. That dynamic reversed course as the year progressed, with net trade propping up top-line growth by nearly 3 percentage points in Q3 and a half percent in Q4.
Similarly, business inventories have been in the process of stabilizing this year, although some have been challenged to “rightsize” their stock levels. Inventory change alone accounted for roughly half of the Q4 increase, partially reversing the drag in the two previous quarters.
Underlying that were much more pedestrian results for the critical personal consumption component of the economy, which accounts for about two-thirds of total activity. Domestic final demand fell to 1.4% for the quarter.
On a positive note, personal consumption increased at a 2.1% annualized rate in the fourth quarter, a growth pace that has been little changed since early in 2022. What has changed is how consumers are spending. In that regard, the report provided was some evidence that consumer spending on goods may finally be stabilizing. Goods spending increased at a 1.1% annualized pace in Q4 — a meaningful development coming off three consecutive negative quarters.
Spending on services remains a comparative area of strength, although the pace of gains has slowed in recent quarters. The 2.6% increase in personal consumption on services is still reflective of the lingering effects of the pandemic on a sector that lagged badly in the early days of the recovery and continues to play catch up.
Housing remains a meaningful headwind to growth, as surging home prices and sharply higher mortgage rates threw ice water on the once hot sector.
Underlying all of this is an array of other data on manufacturing, services, and the retail sector that point to an economy that’s slowing and at risk of slipping into at least a mild recession in 2023. The comparative resiliency of the consumer sector has been key, supported by tight labor markets, solid wage gains, and a stockpile of savings accumulated since 2020. The result? Consumers have for the most part continued to increase their spending, even after accounting for the corrosive effect of the highest inflation in decades.
For the same reasons we cautioned against being too pessimistic about the negative GDP prints in the first half of 2022, we’d suggest dampening enthusiasm about the stronger-than-expected first look at Q4 GDP. To be sure, growth is better than contraction, but the underlying sources of growth matter. The distortive effects of the policies imposed to contain COVID-19 globally were critical drivers in the ebb and flow of GDP in 2022. We expect those ripple effects to lessen with each successive quarter but arguably contributed to a Q4 GDP print that suggests greater underlying strength than is actually present.
The bottom line? Just as the economy wasn’t as weak in the first half of 2022 as GDP reports suggested, it’s also not as strong as the Q4 GDP release would indicate. Held aloft by resilient consumer spending, the economy expanded at a solid pace late last year but remains vulnerable to a more pronounced slowdown in the coming quarters.
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