January 26, 2023

US real GDP in 4Q22 grew at an annualized rate of +2.9% q/q, higher than expected, seeming to allay recession fears. This was down from +3.2% in Q3.

That means that for 2022 as a whole, real GDP grew +2.1%, down from a +5.9% spike in 2021 due to the bounce back from Covid.

The composition of real GDP growth in 4Q22 was: +2.9% = +1.4 consumption, +0.1 business investment, +1.5 inventories, -1.3 housing, +0.6 government spending, +0.6 net exports.

In contrast, the composition of GDP growth in 3Q22 was: +3.2% = +1.5 consumption, +0.8 business investment, -1.2 inventories, -1.4 housing, +0.7 government spending, +2.9 net exports.

Despite the seemingly high GDP numbers in Q3 and Q4, the underlying drivers of domestic demand are fairly weak. The difference is being made up by net exports (in Q3 and a lesser extent Q4) and inventory restocking (Q4).

I’ll focus on the Q4 numbers first, then turn to the annual numbers.

Consumption grew at an annualized rate of +2.1% in Q4, down from +2.3% in Q3, and contributed +1.4 points to GDP growth (down from +1.5 points in Q3).

Business investment cooled off to a rate of just +0.7% in Q4, down from +6.2% in Q3, and contributed just +0.1 point to GDP growth, down from +0.8.

On the other hand, businesses restocked inventory in Q4, adding +1.5 points to GDP growth, after two straight quarters of drawing down inventory.

Residential investment continued to plunge, dropping at a rate of -26.7% in Q4, after falling -27.1% in Q3. This makes the 7th straight quarter of negative growth in housing (which hasn’t seen a positive quarter since 1Q21).

Government spending grew at a rate of +3.7% in Q4, unchanged from Q3, and added +0.6 points to GDP growth. This was mainly led by a +11.2% increase in federal non-defense spending.

The US trade deficit continued to shrink for a third quarter in a row, resulting in an adjustment of +0.6 points to GDP growth. Exports fell by -1.3% (down from a +14.6% rise in Q3) while imports fell by -4.6% (after falling -7.3% in Q3).

The PCE price index rose +5.5% q/q in Q4, down from +5.7% in Q3. Core PCE (excluding food and energy) rose +4.7% in Q4, unchanged from Q3. Note that these are q/q figures giving a snapshot of current price momentum, NOT y/y rates.

The headline GDP number for Q4 (and Q3) suggests resilience. But the underlying numbers indicate slowing drivers of growth distorted by inventory fluctuations and offset by a reduction in the trade deficit, including a decline in imports. Inflation is cooling, but only gradually.

In short, this is not a particularly strong quarterly GDP report, and the picture for the US economy remains complex and mixed.

Now I’ll turn to the annual GDP figures, for a bigger picture. The comparisons can be seen here:

The composition of GDP growth in 2022 was as follows: +2.1% = +1.9 consumption, +0.5 business investment, +0.7 inventories, -0.5 housing, -0.1 government spending, -0.4 net exports.

In contrast, the composition of GDP growth in 2021 was: +5.9% = +5.5 consumption, +0.8 business investment, +0.2 inventories, +0.5 housing, +0.1 government spending, -1.3 net exports. (This was the picture of a very strong rebound from Covid).

Consumption grow +2.8% in 2022, down from a +8.3% rebound in 2021. It contributed +1.9 points to GDP growth, still a very respectable showing.

Business investment grew +3.6% in 2022, down from +6.4% in 2021, and added +0.5 points to GDP growth. Inventories added another +0.7 points. Overall, however, these numbers suggest a cautious outlook by business, perhaps constrained by supply chain issues as well.

Residential investment fell -10.7% in 2022, after rising +10.7% in 2021. Housing is clearly in a downturn, one which has been growing in momentum.

Government spending fell -0.6% in 2022, after growing +0.6% in 2021. Both federal defense and non-defense spending declined and shaved a small amount off GDP, in real terms.

US exports rose +7.2% in 2022, up from +6.1% in 2021. Imports rose +8.1%, down from +14.1% in 2021. Overall, the trade deficit rose, adjusting GDP downwards by -0.4 points, but this widening cooled and then reversed as the year progressed.

The PCE price index for 2022 as a whole was up +6.2%, gaining momentum over a +4.0% rise in 2022. However, this upward trend had reversed by the end of the year.

Core PCE (excluding food and energy) rose +5.0% in 2022, up from +3.5% in 2021. This momentum began to stabilize, however, near the end of the year.

The overall picture the GDP figures present in 2022 is the trailing off of the strong rebound experienced in 2021, complicated by rising price pressures and a downturn in the housing market.