Strong US economic growth expected in fourth quarter, outlook darkens

WASHINGTON, Jan 26 (Reuters) – The U.S. economy likely maintained a strong pace of growth in the fourth quarter as consumers stepped up 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 lingering effects of the Federal Reserve’s fastest monetary tightening cycle since the 1980s began. Most economists expect a recession within the second half of the year, but a mild one compared to previous downturns.

Retail sales have weakened sharply in the past two months, and the industry appears to have entered the housing market in recession. While the labor market remains strong, business sentiment continues to sour, which could ultimately hurt hiring.

“This looks like it could be the last really positive, strong quarterly run that we’ll see for a while,” said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Markets and most people will see through this number. Recent data suggests that economic momentum continues to wane.”

According to a Reuters poll of economists, GDP growth likely rose at a 2.6% annual rate last quarter after accelerating 3.2% in the third quarter. Estimates ranged from a rate of 1.1% to a pace of 3.7%.

Robust growth in the second half of the year will erase the decline of 1.1% 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 key interest rate by 425 basis points from near zero to 4.25%-4.50%, the highest. since the end of 2007.

Consumer spending, which accounts for more than two-thirds of US economic activity, is expected to have grown at a pace faster than the 2.3% rate in the third quarter. It will mainly reflect an increase in commodity consumption at the beginning of the quarter.

Spending has been underpinned by labor market resilience as well as surplus savings accumulated during the covid-19 pandemic. But demand for durable manufactured goods, which are mostly bought on credit, has faltered and some households, especially lower-income ones, have depleted their savings.

Economic growth is also likely to have received a boost from business spending on equipment, intellectual property and non-residential structures. But with the demand for commodity refueling, business spending also lost some luster as the fourth quarter ended.

Despite the clear signs of a weak transition to 2023, some economists are cautiously optimistic that the economy will move past an outright recession, but rather suffer a rolling decline, with sectors falling again rather than all at once.

ROLLING RECESSION

They argue that monetary policy is now acting with a shorter lag than was the case in the past because of advances in technology and the openness of the US central bank, which they said resulted in financial markets and the real economy trading in anticipation of rate hikes.

“We will continue to have positive GDP numbers,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “The reason is that sectors are declining, and not a simultaneous decline. The rolling recession began with housing and now we see the next phase which is consumption-related.”

In fact, with demand for goods falling, factory output has fallen sharply for two consecutive months. Job cuts in the technology industry were also seen as flagging cuts in corporate capital spending.

While housing investment likely suffered its seventh straight quarterly decline, which would be the longest such streak since the collapse of the housing bubble that triggered the Great Recession, there are signs that the housing market may be stabilizing. Mortgage rates have been lower as the Fed slows the pace of rate hikes.

Inventory accumulation was seen to add to GDP last quarter, but with demand slowing, companies are likely to focus on reducing inventory in warehouses rather than placing new orders, undermining growth in the coming quarters.

Trade, which accounted for the bulk of GDP growth in the third quarter, was seen as either making a small contribution or detracting from GDP growth. Strong growth is expected from public expenditure.

While the labor market has so far shown remarkable resilience, economists say worsening business conditions will force companies to cut hiring and lay off workers.

Companies outside the technology industry as well as interest rate-sensitive sectors such as housing and finance are hoarding workers after struggling to find labor during the pandemic.

A separate Labor Department report on Thursday is likely to show that initial claims for state jobless benefits rose to a seasonally adjusted 205,000 for the week ended Jan. 21, from 190,000 the previous week, according to a Reuters poll of economists.

“We expect initial jobless claims to eventually start to pick up after the recent drop, consistent with a possible slowdown in payrolls and an increase in unemployment,” said Kevin Cummins, chief economist at NatWest Markets in Stamford, Connecticut. “In turn, we expect spending to slow as consumers will be less willing to reduce savings in the face of a worsening labor market.”

Reporting by Lucia Mutikani; Editing by Andrea Ricci

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