The U.S. economy grew by 2.1 percent in 2022, notching six months of solid growth despite widespread concern that the country might be on the brink of a recession.
Still, the figure was a cool-down from 3.2 percent growth in the previous quarter, the Bureau of Economic Analysis said Thursday.
The latest figures point to a resilient but slowing economy that has been tempered by the Federal Reserve’s aggressive efforts to control inflation. Although economic growth in the most recent quarter came in stronger than many had expected, analysts say it will have little impact on the Fed’s next move.
The central bank raised interest rates seven times last year — and is expected to do so again next week — in hopes that higher borrowing costs would lead businesses and households to cut back enough to slow the economy and curb price increases.
While some of those rate increases have already had a chilling effect — most notably in 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 may see [growth] and think the economy is out of the woods, but that would be entirely the wrong read,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America, who expects a recession midyear. “There are a lot of variables that are all pointing in the same direction: There’s a housing recession. Manufacturing looks like it’s approaching recession. We’re seeing weakness in temp hiring. And it’s doubtful we’ve felt the full effects of all of the Fed’s rate hikes.”
The snapshot of economic strength is welcome news for the White House at a time when the economy continues to loom large among Americans’ top concerns. President Biden on Thursday called the report “very good news” and cited the strong job market, rising wages and falling inflation.
“Economic growth is up, stronger than experts expected,” he said, speaking at a union facility in Springfield, Va. “I don’t think it’s unfair to say that this is all evidence that the Biden economic plan is actually working. It’s working.”
But Congress needs to raise the debt limit to help the economy, Biden said. A failure to do so would “destroy this progress,” he said.
Wall Street also cheered the data as a sign that the economy has so far been able to withstand higher interest rates. All three major stock indexes were up midmorning, and some analysts said they were hopeful the Fed could engineer a “soft landing” by bringing down inflation without triggering widespread job losses or recession.
“Momentum has already begun to slow in response to rate hikes, but the bulk of the slowdown is yet to come,” Diane Swonk, chief economist at KPMG, wrote in a note to clients. “The Fed’s goal is to let growth stall out in 2023.”
The 2022 economy was, in many ways, defined by stubborn decades-high inflation. Higher prices on housing, food and gas strained family budgets and cut into corporate profits. The economy unexpectedly shrank in the first half of the year — setting off a flurry of recession fears — then returned to growth in the second half.
In the most recent quarter, continued consumer spending on services such as health care and utilities helped lift gross domestic product, which sums up goods and services produced in the U.S. economy. Consumer spending makes up 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 fast-cooling housing market, particularly a drop in construction of single-family homes, according to the report. Exports also decreased, and business spending slowed as companies grappled with higher interest rates.
The 2022 GDP figure marks a return to pre-pandemic growth rates after two years of wild fluctuations. The U.S. economy grew by a whopping 5.7 percent in 2021 after shrinking 3.4 percent the year before.
More broadly, in the decade following the Great Recession, the U.S. economy grew between 1.5 percent and 2.9 percent each year. Although 2022 growth falls squarely within that range, economists say the seesawing numbers behind that average — two quarters of contraction, followed by two quarters of expansion — mask a host of unusual and conflicting data points.
“Unlike most recessions, where the bottom essentially falls out everywhere, we’re in a period where the pain is hitting pockets of the economy at different times,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Everything isn’t pointing in the same direction, which isn’t the norm. It’s unique to the covid era.”
In recent weeks, a number of the country’s biggest tech firms, 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 a slowing labor market could lead families to begin pulling back on purchases, which would further blunt the economy. (Amazon founder Jeff Bezos owns The Washington Post.)
Already, there are signs that Americans are beginning to think twice about spending. Retail sales, which were robust for most of the year, began falling in November and continued their descent through the end of the year. Families are also working through their pandemic-era savings and beginning to rely more heavily on credit cards. Meanwhile, some are putting off big-ticket purchases altogether.
Luke Cole, who builds custom wood furniture in Wilmington, N.C., says sales are down about 30 percent from a year ago, as economic jitters lead many of his clients to put off new purchases.
Although demand had doubled during the pandemic — in large part because so many people were moving into new homes — a slowing housing market has also put a damper on 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 inflation and the looming possibility of recession are beginning to take their toll.”
The housing market, which is already in free fall, could face additional turmoil if laid-off workers do not find new jobs and are forced to sell their homes, economists said. Overall residential investments fell nearly 20 percent in 2022, with new home construction notching its first yearly decline since 2009.
Home sales, meanwhile, have fallen for 11 straight months, according to the National Association of Realtors, as a result of higher borrowing costs. Average mortgage rates more than doubled last year, from 3 percent to 7 percent, making homeownership considerably more expensive for would-be buyers.
At JayMarc Homes near Seattle, sales slowed for much of last year, then came to a complete halt in the last quarter of 2022. The home builder, which typically sells 20 properties a year, did not sell a single house between October and December.
“We were one of the fastest markets in the country — people were begging us to sell them houses — and then suddenly it stopped,” said chief executive Marc Russo, who laid off 10 of his 50 employees in the fall. “No one could predict that interest rates would go up threefold in a matter of eight months.”
This year, though, he says business has improved: He has sold five homes in the past three weeks. But Russo is not rejoicing yet.
“I don’t have a crystal ball,” he said. “The macroeconomy is out of our control.”