Will Growth Fall Off a Ledge?

Two recently released reports and two more events in the coming week are likely to paint a more nuanced picture of the U.S. economy. Last week, the government said that U.S. gross domestic product (GDP) increased at a 2.9 percent annualized pace in the fourth quarter of 2022, capping a year when growth was up by just 1 percent (as measured from the fourth quarter a year earlier), down substantially from the 5.7 percent blazing hot 2021, though up from the horrendous 2020 when the economy shrank by 3.4 percent.

The pandemic really did wallop the economy. The U.S. does not usually see big swings up or down in successive years. In fact, in the five years leading up to COVID-19, here is how the economy, as measured by GDP, performed:

• 2015: +1.9%

• 2016: +2.0%

• 2017: +2.8%

• 2018: +2.3% 

• 2019: +2.6%

Even though the economy eked out a gain last year, there are signs that trouble could be brewing. A day after GDP, the government released the Personal Income and Spending Report for December. According to Paul Ashworth of Capital Economics, “despite the apparent resilience of fourth-quarter GDP growth, the economy was on the precipice of a recession, and may already have fallen off the ledge,” mostly due to a pull-back in spending by consumers and businesses.

OFF A LEDGE? That language may lead you to think that the Federal Reserve might halt its rate hike campaign when they meet this week. But that is not what is expected. The central bank is likely to reduce the amount of the increase from a half of a percentage point to a quarter of a percentage point, because although inflation readings are improving, prices remain high. (While higher interest rates have not sunk the overall economy yet, housing took a breather last year. Residential investment declined last year, while home sales fell almost 18 percent in 2022 from the previous year’s massive increase.)

Later in the week, the government will release the January jobs report, which is likely to show continued deceleration in the labor market. After adding an average of almost 250,000 jobs a month in the last quarter of 2022 (about half the amount during the COVID recovery year of 2021), the consensus for the first month of 2023 is for 175,000 jobs created and for the unemployment to remain close to its 50-year low of 3.5 percent.

Although headline employment readings have remained solid, there is evidence of slowdown. While tech layoffs have grabbed the headlines, there may be a more important labor market indicator. Andrew Hunter of Capital Economics points out that the BLS category of Temporary Help Services “has fallen for five straight months, leaving the three-month average change in negative territory, a decline only previously seen during recessions. That points to a significant slowdown in overall employment growth soon.” Can the U.S. economy step away from the ledge? Stay tuned.