WASHINGTON, Jan 26 (Reuters) – The U.S. economy likely maintained a strong pace of growth in the fourth quarter as consumers boosted spending on goods, but momentum appears to have slowed considerably towards the end of the year, with higher interest rates eroding demand.
The Commerce Department’s advance fourth-quarter gross domestic product report on Thursday could mark the last quarter of solid growth before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s kick in. Most economists expect a recession by the second half of the year, though mild compared to previous downturns.
Retail sales have weakened sharply over the last two months and manufacturing looks to have joined the housing market in recession. While the labor market remains strong, business sentiment continues to sour, which could eventually hurt hiring.
“This looks like it could be the last really positive, strong quarterly print we’ll see for a while,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Markets and most people will look through this number. More recent data are suggesting that economic momentum is continuing to slow.”
According to a Reuters survey of economists, GDP growth likely increased at a 2.6% annualized rate last quarter after accelerating at a 3.2% pace in the third quarter. Estimates ranged from a 1.1% rate to a 3.7% pace.
Robust second-half growth would erase the 1.1% contraction in the first six months of the year.
Growth for the full year is expected to come in at around 2.1%, down from the 5.9% logged in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have grown at a pace faster than the 2.3% rate notched in the third quarter. That would mostly reflect a surge in goods spending at the start of the quarter.
Spending has been underpinned by labor market resilience as well as excess savings accumulated during the COVID-19 pandemic. But demand for long-lasting manufactured goods, which are mostly bought on credit, has fizzled and some households, especially lower income, have depleted their savings.
Economic growth also likely received a lift from business spending on equipment, intellectual property and nonresidential structures. But with demand for goods tanking, business spending also lost some luster as the fourth quarter ended.
Despite the clear signs of a weak handover to 2023, some economists are cautiously optimistic that the economy will skirt an outright recession, but rather suffer a rolling downturn, where sectors decline in turn rather than all at once.
ROLLING RECESSION
They argue that monetary policy now acts with…
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