Dear Commons Community,

The continued growth in the fourth quarter showed the resilience of consumers and businesses in the face of inflation and rising interest rates.The economy remained resilient last year in the face of inflation, war and a Federal Reserve intent on curbing the pace of growth.

A repeat performance in 2023 is far from guaranteed.

U.S. gross domestic product, when adjusted for inflation, increased at an annual rate of 2.9 percent in the fourth quarter of 2022, the Commerce Department said on yesterday. That was down from 3.2 percent in the third quarter, but nonetheless a solid end to a topsy-turvy year in which the economy contracted in the first six months, prompting talk of a recession, only to rebound in the second half.

Beneath the quarterly ups and downs is a simpler story, economists said: The recovery from the pandemic recession has slowed from the frenetic pace of 2021, but it has retained momentum thanks to a red-hot job market and trillions of dollars in pent-up savings that allowed Americans to weather rapidly rising prices. Over the year as a whole, as measured from the fourth quarter a year earlier, G.D.P. grew 1 percent, down sharply from 5.7 percent growth in 2021.  As reported by The New York Times.

“2020 was the pandemic; 2021 was the bounce-back from the pandemic; 2022 was a transition year,” said Jay Bryson, chief economist for Wells Fargo.

The question is, a transition to what? Mr. Bryson, like many economists, expects a recession to begin sometime this year, as the effects of higher interest rates ripple through the economy.

The initial rebound from the pandemic recession was much stronger in the United States than it was in much of the rest of the world. The gap widened last year as the war in Ukraine threatened to push Europe into a recession and the strict Covid suppression policies in China constrained growth there.

But the U.S. economy faces fresh challenges in 2023. Inflation remains too high by many measures, and the Fed is expected to continue increasing rates in an effort to bring prices under control. A congressional showdown over raising the debt ceiling could cause further turmoil in financial markets — or a crisis if lawmakers fail to reach a deal.

Already, there are signs of strain, especially in the sectors most sensitive to higher borrowing costs. Construction activity and home sales have slowed significantly. Tech companies have announced tens of thousands of layoffs in recent weeks. Manufacturing output fell in November and December.

Still, in the consumer-driven U.S. economy, a recession is all but impossible as long as households keep opening their wallets. So far, they have done so. Consumer spending rose at a 2.1 percent rate in the fourth quarter, down only slightly from the third-quarter pace. Americans have proved particularly willing to shell out for vacations, restaurant meals and other services that they had to forgo earlier in the pandemic. Luxury spending, too, has remained strong, buoyed by higher-income consumers who are less affected by inflation.

Good economic news!

Tony

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