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The economy is slowing, despite strong GDP growth of 2.9% and 3.2%, in the fourth and third quarters of 2022, respectively. Recent signs of economic weakness: a second consecutive month of industrial production declines, and a continuing drop in housing starts and sales. Half of the fourth-quarter growth was due to businesses adding to inventories, which could indicate weakening purchases. Even the strong labor market is showing hints of a slowdown, with a widespread drop in hours worked across industries, plus reports of mass layoffs by major corporations. The odds of a recession starting later in the year are about 60% at the moment.
The U.S. consumer is supporting the economy right now. Consumer spending grew by 2.8% in 2022. Consumers have $2 trillion in extra savings built up during the pandemic, though most of this is owned by high-income households. Inflation is discouraging some purchases.
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The Federal Reserve is still determined to raise interest rates to combat inflation, which appears likely to tip the economy into a mild and short recession. However, continued signs of a slowing economy will likely cause the Fed to raise rates by only a quarter-percentage point at its next meeting on February 1. The Fed will likely pause its rate hikes by mid-year, but will not give up on them entirely until inflation starts coming down a lot.
Every cloud has a silver lining: The slowing economy will reduce inflation and take the edge off the shortage of workers and new car order backlogs, perhaps allowing supply to catch up with demand.
On balance, GDP growth slowed to 2.1% in 2022 and will slow further to 0.8% in 2023 if there is a mild recession. If a recession can be avoided, growth in 2023 will likely be around 1.3%.
Source: Department of Commerce: GDP Data (opens in new tab)
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