US Q4 GDP - The details are less encouraging than the headline
Q4 GDP grew somewhat stronger than expected, at 2.9% q/q annualised, while Q3 GDP was also upwardly revised, to 3.2% from 2.6% in the 3rd estimate. However, the strength was driven by volatile components such as inventories and government spending, with underlying domestic demand – consumption and investment – comparatively weak.
Strong headline growth disguises underlying weakness
The decline in investment in particular accelerated, falling -6.7% annualised following a -3.5% decline in Q3. Consumption posted a solid gain of 2.1% annualised in Q4, but as we flagged last week following the retail sales report, this strength was concentred in October, with November and December data suggesting consumption has lost significant momentum (weekly Redbook retail sales suggest this weakening trend has persisted into January). Net exports also made a positive contribution in Q4, but both exports and imports contracted – it’s just that the decline in imports significantly outpaced that of exports (-4.6% vs -1.3% annualised).
Late Q4 weakness sets the stage for Q1-Q2 contraction
All told, annual 2022 GDP came in at 2.1%, a touch higher than our latest forecast of 2%. Given the weakness evident late in Q4, as well as the incoming data for January so far, we continue to expect Q1 GDP to show a decline in output, with our current estimate for around a -1% annualised contraction. We expect declining output to persist into Q2, which would meet the technical recession definition of two consecutive quarters of falling output. While this might not be enough by itself for the NBER to officially declare a recession (the US experienced such a technical recession in the first half of 2022), we expect a rise in unemployment as the year progresses to ultimately meet the official recession definition. However, we expect the recession to be a relatively mild one, and we keep our forecast for annual average 2023 growth at 0.7%. Please see below for our full set of quarterly growth, unemployment and inflation forecasts, and for more discussion on the US economic outlook, see our published on Monday.
GDP is expected to contract in the first half of 2023
