In the last three months of 2022, the United States economy grew by an annual rate of only 2.7%, according to a new report. While this is not a bad measure, it fell short of the US Department of Commerce’s initial 2.9% growth estimate. Slowing of the country’s gross domestic product—typically a broad and reliable metric for economic activity—might suggest the Federal Reserve’s string of precipitous interest rate hikes is hitting harder than had originally been anticipated.
The slower economic growth rate might seem like a welcomed reprieve that could slow the Fed’s future rate hike momentum. The latest economic report also suggests that even more inflation could be on the way. Even though the Fed’s most recent rate hike, in early February, was only one-quarter of one percentage point, it appears inflation is having a bigger impact than expected.
For one, the jobs report reveals that employment remains strong. First-time unemployment filings are down 3,000, to 192,000 (for the week ending February 18). Economists had expected that number to be closer to 200,000, so both the decline and amount of decline are surprising. Similarly, continuing claims (filings for people receiving at least one week of unemployment insurance benefits) fell to 1.654 million from 1.696 million the previous week. Analysts had expected this number to grow to 1.7 million.
The US economy added 517,000 additional jobs in January, too. This was also far beyond the slowdown analysts had expected. In fact, these additions dropped the unemployment rate to 3.4%, a level not seen in nearly 34 years. Couple this with a 3.7% bump in the Personal Consumption Expenditures (PCE) Price Index—up from 3.2% the quarter prior—and it should be clear that more money should be circulating throughout the economy, even if spending might decrease.
Hiring has been solid, but a tighter labor market means increasing wage costs. Combined with higher Fed interest rates, this could lead to another recession. This is especially true if the Fed feels encouraged to continue on its current path.
