Economy grew at 2.9% rate last quarter

WASHINGTON — The US economy expanded at a 2.9% annual pace from October through December, ending 2022 with momentum despite the pressure of high interest rates and widespread fears of a looming recession.

Thursday’s estimate from the Commerce Department showed that the nation’s gross domestic product — the broadest gauge of economic output — decelerated, last quarter, from the 3.2% annual growth rate it had posted from July through September. Most economists think the economy will slow further in the current quarter and slide into at least a mild recession by midyear.

The economy got a boost, last quarter, from resilient consumer spending and the restocking of supplies by businesses. Federal government spending also helped lift GDP. But with higher mortgage rates undercutting residential real estate, investment in housing plummeted at a 27% annual rate for a second straight quarter.

For all of 2022, GDP expanded 2.1% after growing 5.9%, in 2021.

The economy’s expected slowdown in the months ahead is an intended consequence of the Federal Reserve’s aggressive series of rate increases. The Fed’s hikes are meant to reduce growth, cool spending and crush the worst inflation bout in four decades. Last year, the Fed raised its benchmark rate seven times. It is set to do so again next week, though this time by a smaller amount.

The resilience of the US job market has been a major surprise. Last year, employers added 4.5 million jobs, second only to the 6.7 million that were added, in 2021, in government records going back to 1940. And last month’s unemployment rate, 3.5%, matched a 53year low.

But the good times for America’s workers aren’t likely to last. As higher rates make borrowing and spending increasingly expensive across the economy, many consumers will spend less and employers will likely hire less.

“Recent data suggest that the pace of expansion could slow sharply in (the current quarter) as the effects of restrictive monetary policy take hold,” Rubeela Farooqi, chief US economist at High Frequency Economics, wrote in a research report. “From the Fed’s perspective, a desired slowdown in the economy will be welcome news.”

Consumer spending, which fuels about 70% of the entire economy, rose at a sturdy 2.1% annual rate, from October through December, down slightly from 2.3% in the previous quarter.

More recent numbers, including a 1.1% drop in retail sales, last month, indicate that consumers have begun to pull back.

“That suggests higher rates were starting to take a bigger toll and sets the stage for weaker growth in the first quarter of this year,’’ said Andrew Hunter, senior US economist at Capital Economics.

Economists at Bank of America expect growth to slow to a 1.5% annual rate, in the January-March quarter and then to contract for the rest of the year — by a 0.5% rate, in the second quarter, 2%, in the third and 1.5%, in the fourth.

The Fed has been responding to an inflation rate that remains stubbornly high even though it has been gradually easing. Year-over-year inflation was raging at a 9.1% rate, in June, the highest level in more than 40 years. It has since cooled — to 6.5%, in December — but is still far above the Fed’s 2% annual target.

“The US economy isn’t falling off a cliff, but it is losing stamina and risks contracting, early this year,’’ said Sal Guatieri, senior economist at BMO Capital Economics. “That should limit the Fed to just two more small rate increases in coming months.’’

One additional threat to the economy this year is rooted in politics: House Republicans could refuse to raise the federal debt limit if the Biden administration rejects their demand for broad spending cuts. A failure to raise the borrowing cap would prevent the federal government from being able to pay all its obligations and could shatter its credit.