US economy ended 2022 on solid footing to show GDP. But a recession could be looming.

The US could be headed for a recession this year, but it would be hard to say based on the economy’s solid performance in late 2022. Gross domestic product grew faster-than-usual for likely the second straight quarter.

Here’s what to watch for on Thursday morning’s release of fourth-quarter GDP.

recovery in the second half

The US is expected to grow at an annual pace of 2.8% in the October-December period, according to the Wall Street DJIA.
-0.12%
Analyst. GDP is the official scorecard of the economy.

GDP also rose by 3.2% in the third quarter, recovering from two consecutive declines in the first half of the year.

Consumers stay tuned

Americans spent big towards the end of 2022 — enough to keep the economy running. Household spending typically generates about 70% of US economic activity.

Consumer purchases of goods and services such as new cars or vacation trips are likely to have risen by around 2.5% after adjusting for inflation, economists estimated. This is slightly above the pre-pandemic average.

However, economists don’t expect a repeat in early 2023. They predict spending will slow to less than 1% in the first quarter, which spans January through March.

Rising interest rates, orchestrated by the Federal Reserve to bring down high inflation, have made large items more expensive and curbed consumer appetites. High inflation is also slowing down spending.

The slowdown in spending appeared more dramatic in the last two months of the year.

“As confirmed by the latest retail sales data, consumer spending strength was limited to October, and spending momentum slowed sharply towards the end of 2022,” Nationwide economists noted in a report to clients.

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business blues

Business in the fourth quarter was probably mixed.

Builders curtailed their investments as high mortgage rates stifled home sales. And corporate spending on equipment and structures was likely weak.

Still, businesses may have stocked up on unsold goods ahead of the holiday season. With higher inventories contributing to GDP, the total could get a significant boost.

The problem is that if the economy continues to slow, any boost from inventories won’t last. Companies typically cut output — and jobs — when demand slacks.

If enough layoffs follow, the economy could spiral downward.

Quiet trade deficit

Large swings in the US trade deficit played an outsized role in the ebb and flow of GDP over the first nine months of last year, but it is unlikely to play a large role in the fourth quarter.

Changes in imports and exports appear to have largely offset each other.

Small government boost

Government spending has had a larger than usual impact on GDP since the pandemic began in early 2020, but played a smaller role in the fourth quarter.

Economists predict that government spending will boost US growth by a few tenths of a percentage point.

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