Still, the figure was a chill of 3.2 percent growth in the prior quarterthe Bureau of Economic Analysis said on Thursday.
The latest numbers point to a resilient but slowing economy that has been tempered by the Federal Reserve’s aggressive efforts to control inflation. The central bank raised interest rates seven times last year in the hope that higher borrowing costs would prompt businesses and households to cut enough to slow the economy and stem price rises.
While some of those rate hikes have already had a chilling effect, notably on the housing market, economists say it could be months before inflation returns to normal. Many major banks are forecasting an economic downturn this year.
“You can see [growth] and I think the economy is out of the woods, but that would be a completely wrong reading,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America, who expects a recession by midyear. “There are many variables that all point in the same direction: There is a real estate recession. It seems that the manufacturing industry is approaching recession. We are seeing weakness in temporary hiring. And it’s doubtful that we’ve felt the full effects of all the Fed rate hikes.”
Wall Street applauded the data as a sign of the economy’s resilience. All three major stock indexes rose by mid-morning, and some analysts said they were hopeful the Fed could engineer a so-called “soft landing” by lowering inflation without triggering widespread job losses or a recession.
The report was also good news for the Fed, but it is not likely to change its plans. The central bank is expected to raise interest rates again next week and possibly a few more times this year.
“Momentum has already begun to slow in response to rate hikes, but most of the slowdown is yet to come,” Diane Swonk, KPMG’s chief economist, wrote in a note to clients. “The Fed’s goal is to let growth stagnate in 2023.”
The economy of 2022 was defined, in many ways, by stubbornly high inflation for decades. Higher housing, food and gas prices put pressure on family budgets and cut corporate profits. The economy contracted unexpectedly in the first half of the year, triggering a wave of recession fears, and then grew again in the second half.
In the most recent quarter, continued consumer spending on services like health care and utilities helped lift gross domestic product, which summarizes the goods and services produced in the US economy. Consumer spending accounts for more than 70 percent of GDP, making it a crucial part of the equation.
An increase in federal government spending also contributed to the gains.
But the economy was dragged down by a rapidly cooling housing market, particularly a drop in construction of single-family homes, according to the report. Exports also fell and business spending slowed as businesses faced higher interest rates.
The 2022 GDP figure marks a return to pre-pandemic growth rates after two years of wild fluctuations. The US economy grew 5.7% in 2021, after contracting 3.4% the previous year.
More broadly, in the decade after the Great Recession, the US economy grew between 1.5% and 2.9% each year. Although 2022 growth falls squarely within that range, economists say the swinging numbers behind that average — two quarters of contraction, followed by two quarters of expansion — hide a number of unusual and conflicting data points.
“Unlike most recessions, where the bottom essentially falls apart everywhere, we’re in a period where pain hits the pockets of the economy at different times,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Not everything points in the same direction, which is not the norm. It is unique to the covid era.”
In recent weeks, several of the country’s biggest tech companies, including Microsoft, Amazon and Salesforce, have announced thousands of layoffs. Although those cuts have not yet spilled over into the broader job market, economists worry that a slowdown in the job market could prompt families to start cutting back on purchases, further weakening the economy. (Amazon founder Jeff Bezos owns The Washington Post.)
There are already signs that Americans are starting to think twice about spending. Retail sales, which were strong for most of the year, began to decline in November and continued to decline through the end of the year. Families are also tapping into their covid-era savings and becoming more reliant on credit cards. Meanwhile, some are putting off major purchases altogether.
Luke Cole, who makes custom wood furniture in Wilmington, North Carolina, says sales are down 30 percent from a year earlier as economic jitters have many of his customers putting off new purchases.
Although demand doubled during the pandemic, largely because so many people were moving into new homes, the slowdown in the housing market has also dampened orders for new tables, chairs and benches.
“I’ve definitely seen a slowdown since the summer,” Cole said. “It hasn’t been a massive drop, but you can tell that inflation and the looming possibility of a recession are starting to take their toll.”
The housing market, already in free fall, could face additional turmoil if laid-off workers fail to find new jobs and are forced to sell their homes, economists said. Overall residential investment fell nearly 20 percent in 2022, with new home construction posting its first annual drop since 2009.
Meanwhile, home sales have fallen for 11 straight months, according to the National Association of Realtors, as a result of higher borrowing costs. Median mortgage rates more than doubled last year, from 3 percent to 7 percent, making homeownership considerably more expensive for prospective buyers.
At JayMarc Homes near Seattle, sales slowed for much of last year and then came to a complete halt in the last quarter of 2022. The homebuilder, which typically sells 20 properties a year, didn’t sell a single home between October and December.
“We were one of the fastest markets in the country, people were begging us to sell them houses, and then all of a sudden it stopped,” said Chief Executive Marc Russo, who laid off 10 of his 50 employees in the fall. “Nobody could have predicted that interest rates would triple in a matter of eight months.”
This year, however, he says business has picked up: he has sold five houses in the last three weeks. But Russo still doesn’t rejoice.
“I don’t have a crystal ball,” he said. “The macroeconomy is out of our control.”
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