Here are some ways to make sense of the latest health report on the economy:
What does that mean for President Joe Biden The short answer: It’s good for him. At least for now. The Fed raised interest rates seven times in the past year to more than 4 percent from near-zero levels during the pandemic. Inflation cooled, but remained high. And the economy still manages to stay afloat.
“This economy is resilient,” said Joseph Brosolas, chief economist at consulting firm RSM US. “And the White House can reasonably take some credit here and run a nice big victory run.”
But while the numbers look stronger than expected from many forecasts a year ago, the year ahead will still be rocky as the full impact of the Fed’s rate hikes is clear, and Fed Chairman Jerome Powell has vowed to do whatever it takes to limit it. . inflation.
White House officials said the report was evidence of the success of Biden’s economic plan. “The first two years of economic growth for President Biden were the strongest two years of economic growth for any president since President Clinton,” said Deputy White House Press Secretary Emily Simmons. chirp.
Republicans took a different view. It was “absurd” to brag about an economy still suffering from high inflation, Tommy Piggott, director of rapid response for the Republican National Committee, said in a statement.
What does that mean for the Federal Reserve? – Estimating per capita primary GDP would not significantly change the central bank’s approach because it attempts a seldom-implemented “soft landing” for the economy in which a series of interest rate increases – in this case historically large and rapid – quell inflation without the economy faltering into recession painful.
Despite its strength on the headline number, the details of the report confirm much of what the Fed’s other numbers tell: Fixed residential investment fell as the mortgage market was hit by interest rate hikes and exports were hit by a stronger dollar. Consumer spending, which accounts for about 70 percent of gross domestic product, increased 2.1 percent in the fourth quarter, slowing from a 2.3 percent increase in the third quarter.
But while inflation remains elevated, improving supply chains, lower oil prices and Fed hikes have clearly depressed consumer prices as new data due out tomorrow is likely to show. The GDP report also showed a decline in inflation, with the price index for gross domestic purchases falling to an annualized 3.2 percent in the fourth quarter from 4.8 percent in the third quarter.
Investors believe the central bank will slow its interest rate increases to a quarter point at its next meeting on February 1 and may halt the increases entirely around the middle of the year.
Democrats and progressive economists don’t want to see any more increases from last February. That seems unlikely. Instead, Powell and his colleagues reported exponential increases at least twice over the summer to push their target to about 5 percent.
There are many risks to the economy – including a potentially devastating political struggle over raising the government’s debt limit this summer. But none is greater than the Fed making a huge policy mistake by tightening too much for too long.
“It’s rare to implement a soft landing, and they may not,” said Rubella Farooqui, chief US economist at High Frequency Economics. “But inflation is coming down and there doesn’t seem to be anything fundamentally wrong with the economy, so it’s not impossible.”
What is going on in the economy The report confirms that while the fourth quarter started out strong, activity faded in December as the Fed’s rate hikes took hold.
The strong figure also included a contribution from rising inventories which are expected to fade as companies anticipate a possible downturn in consumer demand. The decline in the pace of consumer spending indicates declining savings in the Covid era and concern about a. The recession is starting to cool the economy’s biggest engine.
The report also showed that companies are slowing spending on equipment, structures and intellectual property. Capital expenditures rose just 0.7 percent, down from 6.3 percent in the third quarter.
The GDP report generally confirms that while the economy was flirting with recession in 2022, it has survived. And if the Fed executes perfectly and Congress averts debt-reduction disaster, Democrats increasingly believe that Biden will not have to run during or immediately after a recession.
“The biggest story in the economy right now is that consumers defied all expectations and kept the economy growing in 2022,” said Jason Furman, a former chief economic adviser in the Obama administration. “The bigger question in 2023 is whether the economy can continue to expand in the face of headwinds from monetary policy, the housing market, and how much consumers can keep up.”