January 27, 2023 Reading Time: 2 minutes

Real GDP rose 2.9 percent in the 4th quarter of 2022, exceeding estimates ranging from 2.6 to 2.7 percent. This puts the first estimate of overall US economic growth in 2022 at 2.1 percent. While this is notable in light of the brief recession that took place earlier in the year and the aggressive rate hikes undertaken by the Federal Reserve, that growth rate is roughly one-third of real US GDP growth in 2021 (5.7 percent).

Real US GDP 4th qtr (2018 – present)

(Source: Bloomberg Finance, LP)

Personal consumption growth slowed to 2.1 percent from 2.3 percent in the prior quarter, with positive spending on goods, particularly vehicles and vehicle parts. Personal care services, healthcare, housing and utilities led spending on services. Of particular note, final sales to private domestic purchasers rose 0.2 percent in the 4th quarter, a steep decline from the 2.1 percent levels of the first quarter of 2022.

Residential investment declined sharply, down 26.7 percent in the quarter. Mortgage applications fell by 51%, as conditions characterized by rising mortgage rates and a tightening supply of housing prevail. The average 30-year mortgage rate recently fell back below 7 percent. 

Business investment dropped 3.7 percent, as respondents to various surveys became increasingly pessimistic. Inflation, rising interest rates, and uncertainty regarding near-term economic growth are leading firm owners and entrepreneurs to postpone expansion plans. 

Inventories and trade added to overall GDP growth by 2 percent. The trade contribution to the top line is questionable as an indication of growth owing to falling imports versus rising exports. Similarly, higher inventories have a questionable significance. If growing because businesses expect future consumption, they arguably suggest future growth prospects. In conjunction with softening consumer spending, declining business optimism, and increasing strain on households, rising inventories may suggest slackening demand. 

The Fed tightening cycle is likely approaching a pause, but as money supply growth has turned negative and both consumer and business confidence decline, economic fundamentals are softening. American consumers, additionally, are working through the last remnants of the excess savings associated with pandemic stimulus programs. Caution is warranted. 

Peter C. Earle

Peter C. Earle

Peter C. Earle is an economist who joined AIER in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area. His research focuses on financial markets, monetary policy, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Selected Publications

“General Institutional Considerations of Blockchain and Emerging Applications” Co-Authored with David M. Waugh in The Emerald Handbook on Cryptoassets: Investment Opportunities and Challenges, edited by Baker, Benedetti, Nikbakht, and Smith (2023)

“Operation Warp Speed” Co-authored with Edwar Escalante in Pandemics and Liberty, edited by Raymond J. March and Ryan M. Yonk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic Order of Video Games, edited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns” Co-authored with Phillip W. Magness, Wall Street Journal (December 2021)

“How Does a Well-Functioning Gold Standard Function?” Co-authored with William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pied Pipers of Lucre, Then and Now” in Financial History (Summer 2021)

“Boston’s Forgotten Lockdowns” in The American Conservative (November 2020)

“Private Governance and Rules for a Flat World” in Creighton Journal of Interdisciplinary Leadership (June 2019)

“’Federal Jobs Guarantee’ Idea Is Costly, Misguided, And Increasingly Popular With Democrats” in Investor’s Business Daily (December 2018)

Books by Peter C. Earle

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