The flexible economy faces significant political risks

The economy grew by a whopping 2.9% in terms of inflation rates in the fourth quarter of 2022. This faster-than-expected performance occurred amid significant headwinds, particularly higher interest rates. But continued monetary tightening and, more importantly, huge fiscal policy uncertainty over the Republicans’ stance on letting the federal government pay its bills could cripple the economy and tip it into recession.

Today’s economic release from the Bureau of Economic Analysis includes a number of good news that are worth highlighting as they reflect great resilience in the face of formidable obstacles. The economy grew by 2.9% in the last three months of 2022. It should be noted that consumer spending barely fell from its pace of 2.3% in the third quarter to 2.1% in the fourth quarter of last year. consumer spending Prices of commodities such as cars, furniture and medicine rose again after falling 0.4 percent in the previous quarter. And, spending on services Such as utilities, housing, health care and going out to eat slowed but still It grew at a solid 2.6%..

Two factors helped support consumer spending at the end of 2022. First, inflation has eased. The price index for personal consumption expenditures — the Fed’s preferred measure of inflation — rose 3.2% in the fourth quarter, down from 4.3% in the third quarter. This reduction in inflation frees up money for consumers to keep spending on essentials like housing and healthcare. Second, Non-inflationary personal income The inflation rate outpaced the growth rate as it grew by 5.6% in the last three months of 2022. After-tax income grew faster at 6.3%, helped by “stimulus payments in the form of one-time refundable tax credits.” Still, Wages and salaries It also grew faster than inflation of 4.9% in the fourth quarter, reflecting a A very strong job market With a near-record low unemployment rate and continued wage gains. Economic performance remains strong with the risk of inflation receding and households continuing to see more money in their portfolios.

It wasn’t just families that fueled economic growth. Business spending also played its part. Increasing business spending on intellectual property such as software 5.3% in terms of inflation rates. As investments in inventories accelerated, contributes 1.46 percentage points to the overall growth rate at the end of 2022. These factors are likely to indicate that companies see continued growth in the future and therefore want to be prepared for increased demand.

That wasn’t all in terms of good news for the economy. Imports fell faster than exports and federal government spending on non-defense items jumped at the end of the year. American businesses and consumers imported fewer computers and industrial supplies. This could be a sign of a shift to more domestic production, but also of lower demand for computers, for example. At the same time, the number of foreign visitors to the United States increased It means more exports of travel and transportation services. Furthermore, the increase in non-defense spending by the federal government Reflected double-digit spending increase In structures such as office buildings, but also in software. Likewise, state and local governments increased spending in all categories — structures, equipment, research and development, among others — at the end of the year. These spending increases have begun to address significant infrastructure shortfalls, and will likely be supported by President Biden signing various pieces of legislation such as the American Rescue Plan Act and the Infrastructure Investments and Jobs Act. These laws provided much-needed funds to state and local governments and greatly boosted infrastructure investments across many areas.

However, the data also highlights some of the risks the economy faces. Consumer spending in general has slowed. Households have also been reduced housing spending increased by 26.7% in the fourth quarter after declining by 27.1% in the third quarter. The decline in housing is the clearest sign of the negative effects of higher interest rates due to aggressive monetary tightening by the Federal Reserve.

Higher interest rates, and especially the risk that the Federal Reserve will go too far in a slowing economy, is not the only danger. the The financial recklessness of the New Republican A majority in the House of Representatives could significantly slow down many factors that are currently contributing positively to economic growth and thus increase the risk of a recession. Homemade policy risks can depress the dollar and raise import prices. It could stop business investment and it could slow government investment. As a follow-up, job and wage growth could slow and thus reduce consumer spending. The economy is currently very resilient in the face of great challenges, but this resilience can only overcome many obstacles. A political gamble with the government’s finances by House Republicans could be too big a hurdle.

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