Economic growth is expected to have slowed slightly in the fourth quarter but was still solid, driven by a strong consumer.
Economists will carefully examine Thursday’s U.S. gross domestic product report for signs of how strong or weak consumer spending really was at the end of 2022. Retail sales suggest spending fell sharply at the end of the year. GDP is reported at 8:30 am ET.
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According to Dow Jones, economists expect US gross domestic product to grow 2.8% in the fourth quarter, compared to 3.2% in the third quarter.
While economists expect a strong fourth quarter, they are divided on where the economy will go from here, and one key is the consumer. Some say the sharp 1.1% drop in retail sales in December shows consumers are withdrawing at the end of the quarter, possibly preluding a recession. But others say it’s too early to discount the consumer and the economy could still avoid contraction.
“I know the consensus is that a recession is imminent, but I’m skeptical,” said Stephen Stanley, Amherst Pierpont’s chief economist. If there is a recession, he expects it to be more like 2024. “I think we’ll stumble through 2023.”
But Kevin Cummins, NatWest’s US chief economist, said he sees a recession on the horizon and he had projected a 1% contraction in GDP in the first quarter, after an estimated 3.2% rise in the fourth quarter.
He said the Federal Reserve’s rate hikes had a delayed effect on the economy and had already plunged housing construction into a recession. The slowdown in home investment slashed growth by a full percentage point in the fourth quarter, he said.
“Real export growth will be weak. Inventories have been rebuilt to the point where you’re not going to get much juice from it,” he said. “It just seems like all the major components of GDP going forward are all on the same page, pointing to weaker growth.”
Cummins said the consumer was still strong at the start of the fourth quarter. “But momentum has slowed down quite noticeably since then,” he said. “It looks like there’s a pretty big hole to dig where you ended the fourth quarter. So the first quarter will start off pretty weak.”
Diane Swonk, chief economist at KPMG, said consumption slowed, as did the momentum of the economy at the end of the fourth quarter. She expects a slight recession this year.
“Q4-Q4 growth is about 0.8%. Year-on-year, it’s about 2%. We ended 2021 so strong after nearly 6% growth,” she said. “Q4-Q4 is more about momentum, and that has slowed despite the 4.5 million paychecks we created.”
The consumer drives two-thirds of the US economy, so consumption is a key swing factor in GDP, which measures the value of the end products and services produced in the US economy.
Michael Gapen, Bank of America’s chief US economist, said he had postponed his view of when a recession might start until the second quarter. He expects consumer spending to remain strong in the fourth quarter, adding that the decline in December retail sales is not an accurate reflection of consumer spending, which may have been brought forward in the quarter.
“The signal should be that consumption will pause in the quarter. The open question is to what extent personal spending has fallen at the end of the year. Was it just a commodity story or was it also a service story?” Gapen said. “That will feed your narrative of whether the slowdown has spread.”
The Federal Reserve will also be watching how well consumers are holding up when the central bank meets next week, Gapen said. He expects it to raise its Fed Funds target by another quarter point.
“We’ve been saying for the past few months that the slowdown should spread beyond housing and into manufacturing. … This signal is clear and makes sense to me. The signal around consumption was still pretty good, and you can’t get it into a recession until consumption rolls over,” Gapen said. “So we need to look at the composition of the data to see any momentum going into the year-end.”
Stanley said he believes a recession is being delayed because consumption remains strong and job prospects are good.
“I think the economy is proving to be more resilient in the short term. … There’s a lot of debate about how much of that cushion has been depleted, but I think households are still left with a huge amount of cash to spend,” Stanley said. “I don’t expect a recession this year. If we do get one, it’s more likely to come in 2024, by which time budgets would have pulled more of the pandemic cushion and you would have a longer period of tight monetary policy.”
Some market strategists are seeing a strong fourth quarter as another sign the economy may be avoiding a plunge into recession, and a better-than-expected report could reinforce that view.
“I think it really speaks to a soft landing, or if we have a recession, it’s a milder recession than people thought in the past,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management.
