In Could of final yr, Tesla CEO Elon Musk stated the U.S. economic system was “most likely” already in a recession that will final 18 months. By September, amid constant doomsday predictions from economists and billionaire buyers, polls confirmed that greater than three-fourths of Individuals agreed.
However regardless of the pessimism, U.S. gross home product (GDP) rose at a 2.9% annualized fee within the fourth quarter, the Bureau of Financial Evaluation reported Thursday. That’s a slight slowdown from the three.2% GDP progress seen within the third quarter, however nonetheless nicely above FactSet consensus expectations for two.3%. And consultants say it’s removed from proof of a recession—particularly when coupled with the three.5% unemployment fee.
“The U.S. economic system continued to increase at a sturdy fee within the fourth quarter,” John Leer, chief economist at choice intelligence firm Morning Seek the advice of, advised Fortune, arguing that “most of that progress was fueled by an incredibly resilient client.”
Nonetheless, Leer famous that though regular client spending within the face of 40-year excessive inflation final yr allowed the united statesto keep away from a recession, he has “began to see that resilience wane extra just lately.”
“Shoppers are more and more struggling to navigate the continued results from the spike in costs final yr by drawing on credit score and financial savings,” he stated. “With client demand prone to proceed its downward trajectory, enterprise funding can also be prone to gradual within the coming quarters, rising the chance of a recession this yr.”
Shoppers’ energy is fading—however is a recession inevitable?
U.S. customers constructed up $2.7 tillion in “extra financial savings” throughout the pandemic, due partially to $1.8 trillion of fiscal stimulus and a pointy pullback in spending throughout lockdowns. However during the last yr, they spent 30% of that financial savings, Ellen Zentner, Morgan Stanley’s chief U.S. economist, defined in a Wednesday notice.
Zenter stated that buyers “tapped their financial savings” with a purpose to proceed their spending habits regardless of rising costs, noting that the family saving fee fell to a two decade low of three.2% in 2022 vs. almost 9% in 2019. On Thursday, she argued that greater rates of interest will weigh on companies and customers this yr, resulting in GDP progress to sink to only 0.2% within the first quarter.
Nationwide chief economist Kathy Bostjancic advised Fortune that rising inventories additionally accounted for 1.5 proportion factors of the general 2.9% GDP progress final quarter.
“The combo of GDP progress isn’t wholesome and bodes poorly for financial progress in 2023,” she argued.
Rising inventories—which might embody corporations’ items prepared on the market, items present process manufacturing, or items acquired for use throughout manufacturing—could be a signal that companies are struggling to dump merchandise, which might result in cutbacks in manufacturing sooner or later and slowing financial progress.
And whereas the newest GDP report confirmed proof of resilient client spending final yr, there was additionally some weak point in a vital stat that’s generally known as “core” GDP—actual last gross sales to non-public home purchasers. The measure strips out authorities spending and web exports to disclose tendencies in underlying demand, and it rose at only a 0.2% annualized fee within the fourth quarter, in comparison with 1.1% within the earlier quarter.
“This core measure of core financial exercise has been cooling since a peak at 10.7% annualized within the second quarter of 2021,” Invoice Adams, chief economist for Comerica Financial institution, advised Fortune, arguing that it’s an indication the economic system was “dropping momentum in late 2022.”
Current financial indicators—together with ISM manufacturing surveys that present a slowdown in that sector and an inverted yield—sign a “robust chance of a recession,” he added. And Adams isn’t alone in his fears for the U.S. economic system. A lot of high economists, CEOs, and a few 70% of Individuals say a U.S. recession is inevitable.
“We nonetheless count on the U.S. economic system to expertise a light recession within the first half of 2023, as still-high inflation and sharply rising rates of interest erode family incomes,” Cailin Birch, international economist on the Economist Intelligence Unit, advised Fortune.
A ‘comfortable touchdown’
However Birch believes that any downturn is prone to be “modest and comparatively short-lived,” and a few consultants are much more bullish. Carol Schleif, chief funding officer, BMO Household Workplace, argues that the newest GDP figures are proof that the Fed’s “comfortable touchdown”—the place inflation is tamed with out sparking a recession—is within the playing cards in any case.
“Whereas the trail is slender, our base case is that the Federal Reserve ought to have the ability to engineer a comfortable touchdown,” she advised Fortune. “Companies and customers are moderating their spending after the preliminary exuberant post-pandemic surge and we count on this slowing of momentum to permit the economic system to tick alongside solidly however on a slower and extra sustainable path.”
David Russell, vp of market intelligence at TradeStation Group, additionally counts himself within the bulls camp, saying that the GDP report is proof that issues are “returning to regular” after three years of “unprecedented financial turmoil.”
“Right now’s numbers are a web constructive as a result of they present moderating costs inflation and a really wholesome job market,” he stated. “Goldilocks appears to be rising from the ashes of Covid, whether or not the naysayers prefer it or not.”
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