Growth and Declines: A US Macroeconomic Update

As inflation remains a pressure point for consumers and investors, imports continued to climb in the fourth quarter of 2022 due to their lower costs, contributing to the rising trade deficit and keeping GDP growth more pressured.

With the holiday season dominating this period, consumer spending grew even as inflation kept prices of goods elevated; government spending also climbed up, contributing to rising GDP. Partly due to these trends, real GDP has been adjusted to increase an annualized 2.7% in the fourth quarter.

While GDP has continued to expand, the Federal Reserve has continued to hike interest rates to push back against inflation, which has also grown in the quarter.

Although various pieces of legislation have been signed, including the Inflation Reduction Act, no immediate signs of a lessening of inflation are set to occur. In turn, the labor market has slowed as more businesses start to cut down on costs by reducing their headcount.

Labor market

• Total nonfarm employment growth has consistently slowed over the past year, adding just 874,000 jobs in the fourth quarter of 2022 with an additional 517,000 added in January 2023 alone, showing signs of a resilient labor market, despite recession concerns.
• Quarterly growth was driven by increased demand for leisure and hospitality, education and health services and professional and business services.
• Following a spike in October 2022, the unemployment rate continued to trend downward, reaching 3.4% in January 2023, the lowest since 1969. However, recession fears and recent layoffs will lead to a rising unemployment rate in 2023.
• Sectors with the most significant employment gains in January include leisure and hospitality, professional and business services and education and health services. However, information and utilities both exhibited declines in January 2023.

Consumer spending

• Personal consumption expenditures (PCE) grew 0.5% in the fourth quarter of 2022 and 7.4% year-over-year as of December 2022. As consumers traveled and dined out more during the holiday season, spending for food services and accommodations and transportation services expanded, boosting spending for the quarter.
• Spending on durable goods decreased 0.7% in the fourth quarter of 2022, driven by less spending on recreational goods and vehicles and other durable goods. Conversely, spending on motor vehicles and parts increased 0.5% during the same period.
• Spending on nondurable goods increased 0.2% in the fourth quarter, driven primarily by increases in food and beverages purchased for off-premises consumption and other nondurable goods, while a 5.6% drop in spending on gasoline and other energy mitigated growth.
• Spending on services increased 2.0% in the fourth quarter of 2022. Greater consumption of transportation services (3.0%) and food services and accommodations (2.8%) increased spending on services in the fourth quarter.

Inflation

• Personal Consumption Expenditures price index (excluding food and energy), the Federal Reserve's preferred inflation measure, increased 0.7% in the fourth quarter of 2022. Year-over-year inflation stands at 4.4% for the year ending in December 2022.
• As measured by the Consumer Price Index (CPI) and including food and energy items, inflation increased 6.4% for the year ending in December 2022. While more volatile, the CPI is the more common inflation figure consumers see as food and energy are major household spending categories.
• CPI decreased slightly in December compared with November, marking the first decline since May 2020. This drop was driven primarily by a 4.5% dip in the energy index in December, despite a boost in October 2022. The gasoline index decreased 9.4%, while the index for natural gas increased 3.0% in December.
• Although the energy index decreased over the past two months, year-over-year growth remains significantly elevated, rising 7.3% over the past 12 months.
• To combat rising inflation, the Federal Reserve has increased interest rates several times in 2022. Additionally, the Inflation Reduction Act of 2022 (IRA) was signed into law in August 2022. However, the Congressional Budget Office does not expect the IRA to notably impact inflation in the near term.

Residential construction trends

• After beginning to depress during the third quarter of 2022, housing prices slumped in the fourth quarter. The number of new housing units grew at an annualized rate of 3.4% in 2022, compared to growing an annualized 4.7% in 2021, indicating that interest rate hikes and high mortgage rates have slowed activity.
• New home construction has continued to hold up between 1.5 million and 1.8 million units under construction in the year. Still, higher mortgage rates have negatively affected buyers' purchasing power by raising the risks of buying a house.
• Despite mounting inflation and interest rate hikes driving residential construction down by 0.9% compared to last quarter, new home construction has remained elevated for multifamily homes, which helped cushion these declines.   
• Despite weakening house prices in the quarter, US mortgage applications decreased on average in 2022, pressured by rising interest rates, driving up mortgage rates.

Nonresidential construction trends

• Nonresidential construction is up 0.9% compared to three months ago, driven largely by conservation and development, lodging and educational construction.
• Despite growth in the previous quarter, manufacturing activity has slumped 0.3% in the fourth quarter as continued higher borrowing costs and inflation remaining high have discouraged growth in these sectors.
• Rebounding service sectors, specifically in the hospitality sector, culled the need for more construction of these outlets, such as hotels and inns, to accommodate demand from consumers that travel more. A strong example of rebounding traveling activity has been boosted air travel in late 2022, with the International Air Transport Association (IATA) reporting that traffic spiked 64.4% in 2022 compared with 2021 figures.
• Greater action taken by the Biden administration to protect public lands in 2022, with the Bureau of Land Management (BLM) committing $160 million to safeguard lands managed by the BLM, helped contribute to the climb of construction in conservation and development in the quarter. As the government finances these projects, this helps protect previously privately funded projects from market volatility, resulting in this sector being one type of nonresidential construction that grew in the quarter.
• The $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) continues to contribute to nonresidential construction spending as activity in the transportation; communication; power, highway and street; and sewage and waste disposal sectors have all increased compared to three months ago.

Financial markets

• The Federal Reserve has noted that inflation has eased slightly, although not enough for them to halt their relentless rate hikes. At the end of the fourth quarter, the Fed raised the federal funds rate target 50 basis points to 4.25-4.50%. In their most recent meeting, the effective federal funds rate was raised an additional 25 basis points, now elevated to 4.50%-4.75%. Starting June 2022, the FOMC began reducing its securities holding, with the aim to decrease the money supply within the economy. The FOMC anticipates to increase the federal funds range to curb ongoing inflation, which the committee attributes Russia's war against Ukraine to the main contributor at this stage. The war is causing significant economic hardship and is elevating global uncertainty and resulting in supply chain issues for key commodities.
• Fears of a harsh recession weighs heavy on investors' minds. Rate hikes that have no indication of ending are subduing investors from investing heavily into the market. However, Jerome Powell's recent comment in the February 2023 press conference, stating that the disinflationary process has started, gave investors confidence. The market remains highly volatile as inflationary concerns and global uncertainty remain elevated.
• Increased inflation, driven by supply and demand imbalances, has resulted in interest rate hikes, contributing to the market's continued decline in 2022. In the 2022 calendar year, the S&P500 returned -14.5%, NASDAQ -25.4% and DIJA -5.6%. Investors constantly keep tabs on inflation to see how severe the Fed's policy will be at each meeting. Volatility in the market will likely continue until the Fed's monetary guidance omits rate hikes.
• The trade deficit rose 12.2%, heavily impacted by foreign supply chains out-performing domestic production. Consumers continued purchasing imported goods, boosted after the height of the pandemic. In response to rising import volume, the Biden administration has incentivized companies to change supply chains, primarily by adding more barriers to trade with China.

Distribution of risk ratings

• Following heightened risk at the start of the pandemic, risk levels tempered in 2021 as restrictions eased. In 2021, 21.6% of industries were rated as a medium-high or higher risk.
• Risk levels worsened in 2022 amid mounting inflation, recession concerns and ongoing supply chain issues, with 32.9% of industries rated as a medium-high or greater risk.
• These concerns are expected to intensify in the outlook as inflation persists, interest rates climb and recession fears worsen. 55.2% of industries are rated as medium-high or higher risk in 2023.

Sector highlights

• Mining – As supply chain issues persist, elevating oil and other commodity prices and driving inflation, the mining sector has continued to benefit. However, declining energy consumption, primarily gasoline, has challenged growth in the fourth quarter as inflation persists. As the global economy recovers and more countries ramp up energy production in response to the growing crisis in Ukraine, the Oil Drilling & Gas Extraction industry is set to be threatened more in the coming years.
• Construction – As rising interest rates drive up borrowing costs for construction projects, risk in the Construction sector has continued to mount. Partly due to increasing interest rates, mortgage rates have also risen, which has pressured residential investments in the fourth quarter. Additional funding and tax credits boosted by legislation like the Infrastructure Investment and Jobs Act (IIJA) and the CHIPS and Science Act are set to aid nonresidential construction activity in the coming years. With these factors, and the continued need for infrastructure to supplement rebounding consumer activity amid inflationary pressures, growth is expected to continue for the Industrial Building Construction industry and the Commercial Building Construction industry.
• Retail Trade – Despite the holiday season, the Retail Trade sector was pressured by inflation, driving up prices for many goods. In turn, consumers have reduced overall consumption of certain goods, mitigating revenue for the Department Stores industry and the Warehouse Clubs and Supercenters industry. With no signs of inflation returning to target levels, recessionary fears are set to persist in 2023, and retail industries will likely endure continued challenges to manage their costs.

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