GDP report could show solid fourth-quarter growth but still signal a recession is coming, economists say

Economic growth is expected to have slowed slightly in the fourth quarter but was still solid, driven by a strong consumer.

Economists will be studying Thursday’s report on U.S. gross domestic product carefully for signs of how strong or weak the consumer actually was at the end of 2022. Retail sales suggest spending fell off sharply as the year came to an end. GDP is reported at 8:30 a.m. ET.

According to Dow Jones, economists expect that U.S. gross domestic product grew by 2.8% in the fourth quarter, down from the 3.2% pace in the third quarter.

While economists see a strong fourth quarter, they are divided on where the economy goes from here and a key is the consumer. Some say the sharp 1.1% drop in December retail sales shows the consumer pulled back at the end of the quarter, possibly a prelude to recession. However, others say it’s too soon to count the consumer out, and the economy could still avoid a contraction.

“I know the consensus view is recession is imminent, but I’m skeptical of that,” said Amherst Pierpont chief economist Stephen Stanley. If there is a recession, he expects it would be more likely in 2024. “I think we stumble through 2023.”

But Kevin Cummins, NatWest chief U.S. economist, said he sees a recession on the horizon and he has penciled in a 1% decline in first-quarter GDP, after an estimated 3.2% gain in the fourth quarter.

He said the Federal Reserve’s rate hikes have a lagged effect on the economy, and they have already sent housing into a recession. The slowdown in residential investment has taken a full percentage point off of growth in the fourth quarter, he said.

“Real export growth is going to be weak. Inventories have been rebuilt enough that you’re not going to get much juice from that,” he said. “It just seems like all the major components in GDP are all on the same side going forward, pointing to weaker growth.”

Cummins said the consumer was still strong in the beginning of the fourth quarter. “But the momentum since then has weakened pretty noticeably,” he said. “It seems like there’s going to be a pretty big hole to dig out of where you ended the fourth quarter. So the first quarter is going to start pretty weak.”

KPMG’s chief economist Diane Swonk said the consumer slowed and so did the momentum in the economy at the end of the fourth quarter. She expects a shallow recession this year.

“Fourth quarter-to-fourth quarter growth is about 0.8%. Year-over-year, it’s about 2%. We ended 2021 on such a strong note after almost 6% growth,” she said. “Fourth quarter-to-fourth quarter is more about momentum, and that slowed despite the 4.5 million paychecks we created.”

The consumer powers two-thirds of the U.S. economy so consumption is a major swing factor in GDP, which measures the value of the final goods and services produced in the U.S. economy.

Michael Gapen, Bank of America chief U.S. economist, said he has pushed back his view on when a recession might start to the second quarter. He expects to see a still-strong consumer in the fourth quarter, adding that the decline in December retail sales wasn’t an accurate reflection of consumer spending, which may have been brought forward in the quarter.

“The signal should be consumption held up in the quarter. The open question is how much did personal spending fade into the end of the year. Was it just a goods story or was it a services story too?” Gapen said. “That will feed your narrative of whether the slowdown has broadened.”

The Federal Reserve will also be watching to see how well the consumer is holding up when the central bank meets next week, Gapen said. He expects it to raise its fed funds target by another quarter point.

“We’ve been saying in recent months that the slowdown should spread beyond housing and into manufacturing. … That signal is clear, and it makes sense to me. The signal around consumption has still been pretty good, and you can’t get a recession until consumption rolls over,” said Gapen. “That’s why we need to see the composition of the data to see momentum at year-end.”

Stanley said he thinks a recession will be put off because the consumer will continue to be strong and the employment outlook is good.

“I think the economy in the short term proves more resilient. … There’s a big debate about how much of that cushion has been exhausted, but I think households are still sitting on a huge amount of liquid assets that they can spend,” Stanley said. “I do not expect a recession this year. If we’re going to get one, it’s more likely to come in 2024, at which point households would have drawn down more of the pandemic cushion and you would have an extended period of a restrictive monetary policy.”

Some market strategists see a strong fourth quarter as another sign the economy could avoid falling into recession, and a better-than-expected report could reinforce that view.

“I think it really starts to build a case for a soft landing, or if we have recession it’s a milder recession than what people were thinking in the past,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management.