US GDP grew at an annualized pace of 2.9% in the fourth quarter of 2022 which was better than expected. However, analysts see trouble ahead and many forecast a recession in 2023.
The world’s largest economy registered a growth of 2.1% last year which looks decent considering the multiple headwinds including high inflation and multi-year high interest rates.
Notably, US GDP contracted in the first two quarters of 2022. While that would have met the generally accepted definition of recession, The National Bureau of Economic Research, which calls out US economic cycles, uses a different holistic framework.
That said, steady performance in the back half of the year where the Q3 GDP expanded 3.2% before slightly slowing down to 2.9% in the fourth quarter, helped the US economy rise at a healthy pace in 2022.
In its release, the US Bureau of Economic Analysis said, the rise in GDP “reflected increases in private inventory investment, consumer spending, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and exports.”
It said that construction of new single-family homes fell which dragged down the GDP growth. Also, US consumer spending growth slowed down. Incidentally, US retail sales fell on a yearly basis in December as high inflation and macroeconomic uncertainty dampened sentiments.
Analysts Still See a Recession in 2023 despite Better-Than-Expected Q4 GDP
While US GDP growth surpassed estimates and President Joe Biden hailed it as “some very good news about the American economy” many analysts see trouble ahead for the world’s largest economy.
Andrew Hunter, senior U.S. economist for Capital Economics said, “The mix of growth was discouraging, and the monthly data suggest the economy lost momentum as the fourth quarter went on.”
He added, “We still expect the lagged impact of the surge in interest rates to push the economy into a mild recession in the first half of this year.”
Jim Baird, chief investment officer at Plante Moran Financial Advisors said, “Just as the economy wasn’t as weak in the first half of 2022 as GDP reports suggested, it’s also not as strong as the Q4 GDP release would indicate.”
Many US Banks See a Mild Recession as a Base Case Scenario for 2023
Major US banks including Bank of America, JPMorgan Chase, and Wells Fargo see a mild recession as their base case scenario for 2023. While recession impacts most sectors of the economy, some of the investments are largely recession-proof.
The World Bank has slashed its 2023 global GDP growth forecast to a mere 1.7% which is way below its previous projection of 3% growth. It also fears a recession this year amid slowing global growth.
If the World Bank’s projections turn out to be true, it would be the third worst global growth in almost three decades. The global economy fared poorly only during the Global Financial Crisis and the 2020 COVID-19 pandemic.
Meanwhile, the World Bank is not the only agency worried about a recession, even the IMF predicted that a third of the world would be in a recession this year. IMF’s head Kristalina Georgieva said, “Even countries that are not in recession, it would feel like recession for hundreds of millions of people.”
US stocks along with most other risk assets tumbled in 2022 amid the deteriorating macro environment. Fed’s rate hikes, recession fears, and the fallout of FTX bankruptcy have also taken a toll on digital assets. We have a guide on whether crypto is recession-proof.
Rising Layoffs Could Dampen US GDP in 2023
There has been a wave of layoffs across different sectors. Companies like Microsoft, Alphabet, Hasbro, IBM, SAP, 3M, and Newell Brands have announced mass layoffs in 2023. Some of the tech bosses have also taken a hit to their 2023 compensations.
The rising layoffs could also dampen US GDP growth in 2023. The Fed might also take the slowing economy into account as it heads to its first meeting of 2023. Consensus estimates call for a 25-basis point rate hike at the meeting.
However, markets might be more interested in the tone of Fed chair Jerome Powell who has so far shown an inclination to sacrifice GDP growth in order to tame inflation. There are meanwhile some investing strategies that can perform well in high inflation.
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