Strong us economic growth expected in fourth quarter outlook dimmed

WASHINGTON, 26. January (Reuters) – The U.S. economy likely maintained its strong pace of growth in the fourth quarter as consumers boosted spending on goods, but momentum appears to have slowed considerably toward the end of the year as higher interest rates curb demand.

The Commerce Department's early fourth-quarter gross domestic product report could mark the last quarter of solid growth before the delayed effects of the Federal Reserve's fastest monetary tightening cycle since the 1980s kick in. Most economists expect a recession in the second half of the year, albeit mild compared to previous downturns.

Retail sales have weakened sharply over the past two months, and manufacturing appears to have joined housing in the recession. While the labor market remains strong, business sentiment continues to cloud, which could ultimately hurt the hiring rate.

"This looks like it could be the last really positive, strong quarterly print we'll see for a while," said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. "The markets and most people will go through this number. Recent data suggest that economic momentum is slowing further."

According to a Reuters poll of economists, GDP growth likely rose 2.6% annualized in the latest quarter after accelerating 3.2% in the third quarter. Estimates have ranged from 1.1% to 3.7%.

Robust growth in the second half of the year would offset the 1.1% decline in the first six months of the year.

Full-year growth is expected to be about 2.1%, down from 5.9% in 2021. The Fed raised its benchmark interest rate by 425 basis points last year from near zero to a range of 4.25% to 4.50%, the highest since late 2007.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have grown faster than the 2.3% rate recorded in the third quarter. That would mainly reflect an increase in goods spending early in the quarter.

Spending was supported by the resilience of the labor market as well as excess savings accumulated during the COVID-19 pandemic. But demand for durable manufactured goods, which are mostly bought on credit, has stalled, and some households, especially low-income ones, have depleted their savings.

Economic growth also likely received a boost from business spending on equipment, intellectual property and nonresidential buildings. But as demand for goods fell, corporate spending also lost some luster at the end of the fourth quarter.

Despite clear signs of a weak transition into 2023, some economists are cautiously optimistic that the economy will avoid an outright recession, but rather suffer a rolling downturn in which sectors decline sequentially rather than all at once.

ROLLING RECESSION

They argue that because of advances in technology and Federal Reserve transparency, monetary policy is now acting with less of a lag than before, which they believe has led financial markets and the real economy to act in anticipation of rate hikes.

"We will continue to have positive GDP numbers," said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. "The reason for this is that the sectors are taking turns falling off, not declining at the same time. The rolling recession started with housing, and now we're seeing the next phase related to consumer spending."

Indeed, factory output has fallen sharply for two months in a row amid slumping demand for goods. Job cuts in the tech sector were also seen as weakening corporate capital spending cuts.

While housing starts likely suffered their seventh consecutive quarterly decline, which would be the longest such decline since the collapse of the housing bubble that triggered the Great Recession, there are signs that the housing market may be stabilizing. Mortgage rates are trending downward as the Fed slows the pace of its rate hikes.

Inventory accumulation contributed to GDP last quarter, but as demand slows, companies are likely to focus on reducing inventories rather than placing new orders, which would undermine growth in coming quarters.

Trade, which accounted for the bulk of GDP growth in the third quarter, either made a small contribution or detracted from GDP growth. Strong growth is expected from government spending.

While the labor market has proven remarkably resilient so far, economists argue that worsening business conditions will force companies to hire fewer and lay off workers.

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

According to a Reuters poll of economists, a separate Labor Department report on Thursday is expected to show that initial claims for state unemployment benefits for the week ended 21. January to a seasonally adjusted 205.000 have risen from 190.000 in the previous week.

"We expect initial jobless claims to rebound at some point after their recent decline, which will be accompanied by an eventual drop in payrolls and an increase in the unemployment rate," said Kevin Cummins, chief economist at NatWest Markets in Stamford, Conn. "In turn, we expect spending to slow as consumers will be less willing to draw down savings in the face of a deteriorating labor market."