Last week’s data were mixed, with some looking quite good and others signaling the economy may already be in recession. The U.S. economy grew a strong 2.9% annualized in the fourth quarter, and growth in all of 2022 was a solid 2.1%, down from 5.9% in 2021.
But underlying details of the GDP report were considerably weaker. Nearly all growth last quarter came from higher inventories and government spending, and from lower imports, which add to GDP. Core GDP components that track with the business cycle like consumer spending and business investment softened or contracted outright. Household spending growth eased to 2.1% annualized in the fourth quarter from 2.3% in the third. Private nonresidential investment decelerated sharply to 0.7% annualized from 6.2%.
And residential investment plunged 26.7% annualized. Real business fixed investment (residential and nonresidential) fell a third consecutive quarter and is down 3.8% (not annualized) from the first quarter. Since the late 1940s, almost all declines in fixed investment this deep and long occurred in recessions.
The GDP deflator — the broadest measure of price pressures in the economy — rose 3.5% annualized last quarter, down from 4.4% in the third and way down from the second quarter’s multidecade high of 9.0%. The personal consumption expenditures (PCE) price index — the Federal Reserve’s preferred measure of inflation — rose 3.2% annualized after 4.3% in the third quarter and 7.3% in the second quarter. Price increases of services consumed by households, however, remained stubbornly above 5% for the third consecutive quarter. Service inflation tends to be “stickier” and is likely to keep overall inflation above the Fed’s 2% target throughout 2023.
While the quarterly data show moderate growth of consumer spending in the fourth quarter, the monthly data are wobblier. Real personal consumption expenditures fell 0.3% in December, and November was revised down to a 0.2% decline from flat in the prior report. Real disposable personal income rose 0.2% in December.
The personal saving rate rose to 3.4% from 2.9% in November, 2.5% in October, and 2.4% in September, which was close to the record low briefly touched in 2005 at the peak of the housing bubble. The saving rate typically falls late in economic expansions as consumers tap credit lines, then rises as they lose access to credit and curtail discretionary spending. That may be happening now: Revolving credit from commercial banks jumped 17% from a year earlier through the end of November, but its increase has slowed to a 5.9% annualized pace since then.
New home sales were 616,000 at a seasonally-adjusted annualized rate in December, near the consensus forecast; November was revised down sharply to 602,000 from 640,000 in the prior release. New home listings were the equivalent of 9 months’ supply at the current sales rate, a level typically only seen in recessions.
Initial jobless claims fell 4,000 to a very low 186,000 in the week of January 21, while continued jobless claims rose 20,000 to 1.675 million in the week of January 14. Initial claims say layoffs are very low, while continued claims are up 26% from half a year ago, a rate of increase that historically has only occurred in recessions.
Bill Adams is senior vice president and chief economist at Comerica. Waran Bhatruethan is a vice president and senior economist at Comerica.
