The final months of 2022 saw a notable deceleration in the US economy, as consumer spending waned and a federal government shutdown took its toll. The world’s largest economy recorded an annualised growth rate of 1.4% for the last quarter of the year, a significant drop from the robust 4.4% growth observed in the previous quarter. This downturn punctuated a tumultuous year marked by fluctuating tariffs, immigration policies, reduced government expenditure, and ongoing inflation challenges.
Economic Overview: A Year of Ups and Downs
The overall growth for the full year stood at 2.2%, a figure that surpassed many expectations given the various pressures. Michael Pearce, chief US economist at Oxford Economics, remarked on the resilience of the core economy, expressing optimism for an uptick in growth moving forward. However, the volatility of trade policies throughout 2022 introduced a level of unpredictability, leading to erratic economic indicators.
The year began with a modest contraction, largely attributed to a surge in imports as companies sought to stockpile goods ahead of anticipated tariffs. This initial downturn was followed by a recovery in the spring and summer, driven by a decrease in foreign imports. Yet, as imports began to rebound in the latter part of the year, economic growth slowed once again. The latest trade data, released on Thursday, revealed a widening trade deficit in December, prompting a wave of downward revisions to growth forecasts for the October to December timeframe. The degree of the slowdown surprised many economists, highlighting the fragility of the current economic landscape.
Consumer Spending and Government Impact
Private investment saw an increase, though it was largely focused on intellectual property and IT-related equipment. In contrast, consumer spending rose by 2.4%, a noticeable decline from the 3.5% growth in the previous quarter. A significant factor in this slowdown was a more than 16% drop in government spending. Paul Ashworth, chief North America economist at Capital Economics, noted that the government shutdown exerted a far greater dampening effect on the economy than earlier data had suggested. He anticipates a reversal of this trend in the coming months.
Before the release of the report, President Donald Trump sought to manage expectations by attributing the economic slowdown to the shutdown, which he claimed cost the US at least two percentage points in GDP. According to estimates from the Commerce Department, the suspension of federal government services alone was responsible for reducing GDP by one percentage point in the final quarter, with the actual impact likely being even more substantial.
Inflation Concerns Persist
In a separate report, an increase in the Personal Consumption Expenditures (PCE) price index—the inflation measure favoured by the US central bank—was noted. The index rose to 2.9% in December, up from 2.8% in the previous month. Analysts suggest that while the slowdown in the fourth quarter may not raise immediate alarm bells due to the shutdown’s influence, the inflation figures could give Federal Reserve officials pause for thought. Olu Sonola, head of US economics at Fitch Ratings, described the PCE report as a “reality check,” indicating that the data could undermine arguments for the Fed to consider lowering interest rates this year. He cautioned that while the market may be anticipating multiple rate cuts, the inflation metrics suggest a more cautious approach is necessary.
Why it Matters
The recent economic slowdown in the US serves as a critical reminder of the complex interplay between government policy, consumer behaviour, and broader economic indicators. As the nation grapples with the consequences of a government shutdown and fluctuating consumer confidence, the path forward remains uncertain. Policymakers and economists alike will be closely monitoring these trends, as they will have significant implications for economic stability and growth in the coming months. Understanding these dynamics is essential for consumers and businesses alike, as they navigate an increasingly unpredictable economic landscape.
