U.S. economy ended 2022 on solid footing, GDP to show. But a recession might loom.

The US may be headed for a recession this year, but it’s hard to tell based on the economy’s strong performance at the end of 2022. Gross domestic product is likely to grow at a faster-than-normal pace for the second quarter in a row.

Here’s what to watch for in Thursday morning’s fourth-quarter GDP release.

Second half recovery

The US is likely to grow at an annual rate of 2.8% in the period covering October to December, according to the Wall Street DJIA,
-0.09%
analyst. GDP is kind of the official scorecard for the economy.

GDP also increased at a rate of 3.2% in the third quarter, recovering from two consecutive declines in the first half of the year.

Users continue to do so

Americans are spending a lot of money through the end of 2022 — enough to keep the economy going. Household spending typically generates about 70% of US economic activity.

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Consumer purchases of goods and services such as new cars or vacation trips are likely to increase about 2.5% after adjusting for inflation, economists estimate. That’s slightly above the pre-pandemic average.

However, economists do not expect a repeat in early 2023. They predict spending will slow to less than 1% in the first quarter, which runs from January to March.

Interest rate hikes orchestrated by the Federal Reserve to lower high inflation have made big-ticket items more expensive and curbed consumer appetite. High inflation also acts as a constraint on spending.

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The slowdown in spending looks even more dramatic in the last two months of the year.

“As recent retail sales data confirmed, strength in consumer spending was capped in October and spending momentum as we exit 2022 cooled sharply,” economists at Nationwide said in a report to clients.

Business blues

The fourth quarter may be a mixed bag for businesses.

Construction companies cut back on investment as high mortgage rates stifle home sales. And business spending on equipment and structures may be weak.

But businesses may have increased stock of unsold goods ahead of the holiday season. As higher inventories add to GDP, the headline figure could get a big boost.

The problem is, any boost from inventory won’t last if the economy continues to slow. Companies typically cut production — and jobs — when demand decreases.

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If enough layoffs occur, the economy can enter a downward spiral.

A calm trade deficit

The big change in the US trade deficit played a big role in GDP fluctuations during the first nine months of last year, but it is unlikely to be a major factor in the fourth quarter.

Changes in imports and exports seem to have offset each other.

Small government stimulus

Government spending has had a larger-than-usual impact on GDP since the outbreak began in early 2020, but it played a smaller role in the fourth quarter.

Economists predict government spending will add several tenths of a percentage point to US growth.

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