GDP Beats Expectations but Underlying Momentum Slowed at the End of 2022

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 2.9 percent seasonally adjusted annualized rate (SAAR) in Q4 2022, bringing the q4/q4 growth rate to 1.0 percent, according to the Bureau of Economic Analysis (BEA). The stronger-than-expected rate was due in part to ongoing volatility in inventory investment and net exports, which added 1.5 and 0.6 percentage points to the headline figure, respectively. Personal consumption, the largest component of GDP, grew at a 2.1 percent annualized rate, a slight slowdown from the 2.3 percent rate in Q3. However, private fixed investment was weak, declining 6.7 percent annualized due to a 26.7 percent annualized drop in residential fixed investment. The combination of consumption and private fixed investment brought real final sales to private domestic purchasers, sometimes thought of as “core” GDP, to a meager 0.2 percent annualized growth rate, the slowest rate since the onset of the pandemic.
• Personal income, adjusted for inflation, rose 0.2 percent in December, according to the BEA. Real disposable personal income and real personal income less transfer payments were also up 0.2 percent. Despite rising incomes, real personal consumption expenditures fell 0.3 percent, their second consecutive monthly decline. The PCE price index ticked up 0.1 percent over the month and was up 5.0 percent over the year. Core PCE rose a more rapid 0.3 percent on the month, though the annual rate still slowed to 4.4 percent, a deceleration of three-tenths.
• Durable goods orders rose 5.6 in December, though this was due almost entirely to a surge in aircraft orders, according to the Census Bureau. Excluding transportation, durable goods orders were down 0.1 percent and core capital goods orders (nondefense excluding aircraft) dropped 0.2 percent.
• The Conference Board Leading Economic Index® (LEI) decreased 1.0 percent in December to 110.5. Over the past six-month period, the LEI has declined 4.2 percent.
• New single-family home sales rose 2.3 percent to a SAAR of 616,000, though November’s figure was revised downward significantly, according to the Census Bureau. In 2022, 644,000 new homes were sold, down 16.5 percent compared to 2021. New homes for sale were flat at 461,000, though the share of those homes that were completed rose to 17.1 percent, up from 15.4 percent in November. The months’ supply was down two-tenths to 9.0.
• The National Association of REALTORS ® Pending Home Sales Index, which records contract signings of existing homes and typically leads closing by one to two months, rose 2.5 percent to 76.9 in December, the first monthly increase since May.

Forecast Impact:

Headline GDP was stronger than we had expected as inventory investment and net trade beat expectations. Still, the underlying details point to an economy that’s losing momentum, which is in line with our expectations for a recession to begin in the first half of 2023. First, personal consumption expenditures were lower than we had expected and monthly data, including a second consecutive month of declining real consumption in the personal income report, showed consumption losing steam towards the end of the quarter. This sets up a low, or perhaps even negative, growth rate for PCE in Q1. Business fixed investment (BFI) was also weaker than expected and points to growing caution among businesses. With core durable goods and shipment orders shrinking in nominal terms in December, BFI also looks to have weakened at the end of the quarter. Finally, we expect the recently volatile inventory investment to swing back in Q1 and provide a drag to GDP. Combined with weak personal consumption, this sets up what we expect to be a modestly negative quarter of economic growth in Q1.

While new home sales rose in December, the release came with a sharp downgrade to November new home sales, which caused the quarter to come in below our expectations. As the supply of completed and nearly completed homes for sale grows, we expect homebuilders to more aggressively discount homes, either through price concessions or through buying down points on mortgage rates, to drive higher volumes of sales. Therefore, while existing home sales will likely continue to be sluggish, we expect new home sales to remain comparatively resilient for the foreseeable future. Still, pending home sales rose in December amid a pullback in mortgage rates, presenting some upside risk to our near-term existing sales forecast.

Nathaniel Drake
Economic and Strategic Research Group
January 27, 2023

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