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The economy is slowing, but not fast. Consumer spending is still holding up after 2.8% growth in 2022. Consumers have $1.7 trillion in extra savings built up during the pandemic, though most of this is owned by high-income households. And spending is holding up because jobs are holding up. Unemployment may be rising, but not very much at the moment. Initial claims for unemployment compensation are at a low level. The labor shortage has meant that workers are still finding new jobs after layoffs. All of this means that it may take a while for a recession, driven by the Federal Reserve’s interest rate hikes, to arrive. The odds of a recession starting later in the year are about 50-50 at the moment.
GDP grew a robust 2.7% in the fourth quarter. There were signs of future slowing, however — a continuing drop in housing starts and sales. Half of the fourth-quarter growth was due to businesses adding to inventories, which could indicate a future slowdown in purchases. Consumer spending is not rising as fast as before. Business spending is pulling back. Even the strong labor market is showing hints of a future slowdown, with a drop in hours worked that is widespread across industries, plus reports of mass layoffs by some major corporations.
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The Federal Reserve is still determined to raise interest rates to combat inflation, which appears likely to tip the economy into a mild and short recession. However, the signs of a slowing economy will probably cause the Fed to raise rates by only a quarter of a percentage point at its next meeting on March 22. The Fed will likely pause its rate hikes sometime in the summer, but it won’t give up on them entirely until inflation starts coming down a lot.
Every cloud has a silver lining: The slowing economy will reduce inflation and take the edge off the shortage of workers and new car order backlogs, perhaps allowing supply to catch up with demand.
On balance, GDP growth slowed to 2.1% in 2022 and will slow further to 1.0% in 2023 if there is a mild recession. If a recession can be avoided, then growth in 2023 will likely be around 1.7%.
Source: Department of Commerce: GDP Data (opens in new tab)
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