US economic growth beats expectations; weekly jobless claims fall

By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy grew faster than expected in the fourth quarter as consumers maintained a solid pace of spending, but momentum had slowed significantly by the end of the year, with higher interest rates eroding demand.

The Commerce Department's advance fourth-quarter gross domestic product report on Thursday also showed growth getting a big boost from a sharp rise in inventory accumulation, some of which is likely unwanted. Business spending on equipment contracted in the fourth quarter.

It could be the last quarter of solid growth before the lagged effects of the Federal Reserve's fastest monetary policy tightening cycle since the 1980s are fully felt. Most economists expect a recession by the second half of the year, though a mild one compared to previous downturns, because of extraordinary labor market strength.

Retail sales have weakened sharply over the last two months and manufacturing looks to have joined the housing market in recession. While the labor market remains strong, business sentiment continues to sour, which could eventually hurt hiring.

"The U.S. economy isn't falling off a cliff, but it is losing stamina and risks contracting early this year," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "That should limit the Fed to just two more small rate increases in coming months."

Gross domestic product increased at a 2.9% annualized rate last quarter, the government said in its estimate on Thursday. The economy grew at a 3.2% pace in the third quarter. Economists polled by Reuters had forecast GDP would rise at a 2.6% rate.

Robust second-half growth erased the 1.1% contraction in the first six months of the year. For 2022, the economy expanded 2.1%, down from the 5.9% logged in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, helped to power growth, mostly reflecting a rebound in goods spending at the start of the quarter, mostly on motor vehicles. Consumers also spent on services like healthcare, housing, utilities and personal care.

Spending has been underpinned by labor market resilience as well as excess savings accumulated during the COVID-19 pandemic. Income at the disposal of households after accounting for inflation increased at a 3.3% after rising at a 1.0% pace in the third quarter. The saving rate rose to 2.9% from 2.7%.

But demand for long-lasting manufactured goods, which are mostly bought on credit, has fizzled and some households, especially lower income, have depleted their savings.

As a result, inventories surged at a $129.9 billion rate compared to a $38.7 billion rate in the prior quarter. Inventories added 1.46 percentage points to GDP growth. Stripping out inventories, government spending and trade, domestic demand increased at only a 0.2% rate, decelerating from the third quarter's 1.1% pace.

U.S. stocks opened higher. The dollar was steady against a basket of currencies. Prices of U.S. Treasuries fell.

ROLLING RECESSION

Despite clear signs of a weak handover to 2023, some economists are cautiously optimistic the economy will skirt an outright recession, suffering instead a rolling downturn where sectors decline in turn rather than all at once.

They argue that monetary policy now acts with a shorter lag than was previously the case because of advances in technology and the U.S. central bank's transparency, which they said resulted in financial markets and the real economy acting in anticipation of rate hikes.

Residential investment suffered its seventh straight quarterly decline, the longest such streak since the collapse of the housing bubble triggered the 2007-2009 Great Recession, but there are signs the housing market could be stabilizing.

Mortgage rates have been trending lower as the Fed slows the pace of its rate hikes.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 186,000 for the week ended Jan. 21, the lowest level since April 2022.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.675 million for the week ended Jan. 14.

Companies outside the technology industry as well as interest-rate sensitive sectors like housing and finance are hoarding workers after struggling to find labor during the pandemic.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci, Chizu Nomiyama and Paul Simao)