US downgrade growth estimates

On Thursday, the US government revised down its estimate of the country’s economic growth rate in the fourth quarter of 2022 from 2.9% to 2.7% despite elevated inflation and rising interest rates. While this was a solid showing, the growth rate represented a slowdown from the 3.2% growth rate recorded from July to September. The Commerce Department also revised down consumer spending growth from 2.1% to 1.4% for the October-December quarter, its weakest showing since the first quarter of 2022. Business spending also slowed, indicating that the economy lost momentum at the end of 2022.

Recent data shows that the US economy has since rebounded, with consumers boosting retail sales in January by the most in almost two years, and employers adding a surprisingly high number of jobs, taking the unemployment rate down to 3.4%, the lowest level since 1969. However, warmer-than-usual weather contributed to some of these gains, and economists do not anticipate similar results in the coming months. Most analysts predict that growth will slow to around a 2% annual rate in the current quarter, January to March.

The Federal Reserve is expected to raise its benchmark interest rate over the next few months and to keep it at a peak through the year’s end to try to combat still-high inflation. According to minutes from its last policy meeting, all 19 Fed officials favoured raising rates at the next two meetings. The Fed’s focus on lowering elevated inflation means that rates will likely continue to move up and remain higher for longer, even if growth slows. This could discourage spending, hiring, and investment and eventually push the economy into a recession.

The boost in incomes seen at the end of 2022 could continue to support consumer spending this year and might have helped drive up retail sales in January. However, if stronger consumer spending persists, it could force the Fed to continue raising rates or keep them elevated for longer to cool the economy and quell inflation. The upward revisions to after-tax income, adjusted for inflation, in Thursday’s GDP report reflected higher wages and salaries than previously estimated, as well as state stimulus payments intended to offset the inflated costs of gas, food, and other necessities.