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US: Real GDP Ended 2022 on a Firm Footing, Though Details Show Demand Adjustment Already Underway  

Real GDP expanded by 2.9% quarter-on-quarter (q/q, annualized) in the fourth quarter of 2022. The reading came in above the consensus forecast of 2.6%. For the year, the U.S. economy expanded by 2.1% – a pace of growth slightly above trend (~1.8%) – though a marked deceleration from 2021’s 5.9%.

Consumer spending grew by 2.1% – a modest deceleration from the 2.3% recorded in Q3. Spending on both services (+2.6%) and goods (+1.1%) were higher on the quarter. Gains in goods were concentrated in non-durables (+1.5%), though durables (+0.5%) eked a small gain.

Non-residential business investment expanded by just 0.7%, with gains almost entirely coming from intellectual property products (+5.3%). Structures (+0.4%) were flat on the quarter – after having declined in each of the prior six quarters – while equipment spending (-3.7%) turned lower.

Residential investment (-26.7%) showed another steep contraction in Q4, as both residential construction and sales activity continued to slow under the weight of higher interest rates.

Government spending rose 3.7% – matching the gain in Q3 – with contributions at both the federal (+6.2%) and state & local (+2.3%) level.

After two quarters of strong gains, exports (-1.3%) retreated, with the pullback entirely concentrated in the exports of goods (-7.0%), while services exports (+12.4%) recorded its strongest gain of the year. Imports (-4.6%) fell for a third straight quarter, which was entirely due to a pullback in goods imports (-5.6%). The overall impact to GDP was positive, with net trade adding 0.6 percentage points (pp) to headline growth.

Inventory investment was also strong, adding 1.5 pp to GDP – a marked improvement from the 1.2 pp drag in the third quarter.

Key Implications

Economic growth appeared to end 2022 on a relatively firm footing, though the headline number was somewhat flattered by a sizeable (and unsustainable) contribution from inventory investment. Moreover, sales to private domestic purchasers – the best gauge of underlying domestic activity – rose by only 0.2% q/q (annualized). This was a sharp deceleration from Q3’s gain of 1.1% and was weighed down by both softening business investment and another outsized decline in residential investment. Even the above trend reading on consumer spending showed some underlying weakness, with services coming in considerably weaker than expected.

The broader demand adjustment appears to have already started towards the end of last year and will only intensify over the coming months as the cumulative impact of higher interest rates continues to bear down on the economy. Our Q1 tracking has GDP growth decelerating to sub-1%, and not returning to trend until late-2024.

TD Bank Financial Group
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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