By Natalie ShermanBusiness reporter, New York
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The US economy did better than expected at the end of last year, despite higher borrowing costs and rising cost of living dragging on growth.
The economy grew at an annualised rate of 2.9% in the last three months of 2022, official figures show.
That was down from 3.2% in the previous quarter, as home sales and construction tumbled.
Some analysts are worried that the US economy is headed for recession, although the jobs market has held up.
The unemployment rate is hovering around historic lows, but other parts of the economy have been weakening.
In December, normally a big month for consumer spending, retail sales dropped 1.1% from a month earlier.
Manufacturing has also suffered, while the stock market dropped sharply last year.
Thursday's report showed housing investment - which is sensitive to interest rates - falling at an annual rate of nearly 27% in the three months to December, driven by declines in the construction of new homes.
But consumer spending, the main driver of the US economy, continued at a solid, albeit slowing, pace.
For the full year, the economy grew by 2.1%. That was down from last year, when the economy roared back to life after the pandemic, expanding by 5.9% - the fastest rate since 1984.
That surge helped spark a rapid rise in prices, pushing the US central bank to intervene to try to stabilise costs.
Last year, the Federal Reserve hiked interest rates from near zero to more than 4% - the highest rate in 15 years.
By lifting borrowing costs, the bank is encouraging consumers to save more and spend less, hoping this will ease the pressures pushing up prices. But it risks triggering a severe slowdown, which could leave millions of people out of work.
Reports of job cuts have been rising. Manufacturing firm 3M, chemicals company Dow, and tech firms IBM and SAP were among the big firms to announce major redundancies this week. But others, such as restaurant chain Chipotle, are adding staff.
Fed officials have said they remain hopeful the economy can adjust without massive job losses, allowing their rate-hiking campaign to end in a so-called "soft landing" instead.
"For almost a year, the Federal Reserve has been trying to achieve a soft landing by raising short-term interest rates just-enough to bring down inflation without causing a recession. It's clear the economy remains relatively strong in the face of the Fed's efforts, suggesting they're succeeding," said Richard Flynn, managing director at Charles Schwab UK.
"However, investors may fear that today's figures are somewhat deceiving as other recent data has pointed towards a recession."
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As a seasoned economic analyst with a deep understanding of global economic trends, I find it imperative to dissect the recent article by Natalie Sherman on the state of the US economy. Drawing on my extensive expertise, I aim to provide a comprehensive overview of the concepts intertwined in this piece.
The article opens by highlighting that the US economy outperformed expectations in the final quarter of 2022, registering a growth rate of 2.9%. This figure, although slightly lower than the previous quarter's 3.2%, defied concerns stemming from higher borrowing costs and an escalating cost of living. I would like to emphasize that such nuanced economic analysis involves considering a multitude of factors, and the growth rate serves as an indicator rather than a standalone metric.
A critical aspect mentioned in the article is the decline in home sales and construction, which could signal potential economic challenges. Housing investment, specifically sensitive to interest rates, witnessed a substantial annualized drop of nearly 27% in the last three months of 2022. This decline is attributed to a decrease in the construction of new homes, pointing to the intricate relationship between interest rates and the housing market.
Consumer spending, identified as the main driver of the US economy, remained robust but exhibited a slowing pace. This is a crucial observation as it indicates the delicate balance the economy is navigating between growth and potential recessionary pressures. The report notes that in December, a typically significant month for consumer spending, retail sales experienced a notable 1.1% drop from the previous month.
Another noteworthy factor is the Federal Reserve's intervention in response to the rapid rise in prices. The Fed raised interest rates from near zero to over 4%, the highest in 15 years, in an attempt to stabilize costs. This move is aimed at encouraging consumers to save more and spend less to alleviate inflationary pressures. However, there are concerns that such measures could lead to a severe economic slowdown, potentially causing job losses.
The article also touches on job market dynamics. Despite a historically low unemployment rate, certain sectors, such as manufacturing, have experienced setbacks, with major companies announcing significant redundancies. This creates a complex scenario where the overall job market resilience contrasts with specific industries facing challenges.
In conclusion, my comprehensive understanding of economic principles allows me to dissect this article with a discerning eye. The interconnectedness of factors such as interest rates, housing, consumer spending, and employment dynamics is evident, underscoring the nuanced nature of economic analysis. While the headline growth rate provides a snapshot, the intricacies of the various components offer a more holistic view of the current state and potential future trajectory of the US economy.
