Warning Sign for the US Economy Buried Deep in Otherwise Upbeat GDP Numbers

President Joe Biden delivers remarks on the economy and inflation in the Eisenhower Executive Office Building in Washington on Jan. 12, 2023. Kevin Dietsch/Getty Images

The latest GDP report showed the U.S. economy grew by a faster-than-expected pace in the fourth quarter of 2022, but that likely overstates America’s economic health as a measure of domestic demand slowed to a crawl, while one key data point buried deep in the report was the worst since the Great Depression.

The U.S. economy expanded 2.9 percent in the fourth quarter of 2022, down from 3.2 percent in the prior quarter, data released Thursday by the Bureau of Economic Analysis show.

Analysts expected a slower, 2.6 percent, pace of growth, with Wall Street rallying on the upside surprise and closing the trading day in the green.

‘Couldn’t Have Been Any Better’?

President Joe Biden took a victory lap, saying at an event in Springfield, Virginia, that the GDP report “couldn’t have been any better.”

Biden touted job and wage growth, as well as easing of inflationary pressures, and took credit.

“I don’t think it’s unfair to say that this is all evidence that the Biden economic plan, because of you all, is actually working,” the president said.

But a deeper dive into the GDP report shows signs of weakness and a possible major red flag.

Warning Signs

For starters, much of the strength in the GDP growth number of 2.9 percent came from inventory building, which added 1.46 percentage points to the headline economic expansion figure.

Net exports added another 0.56 percentage points, but that was driven by a drop in imports rather than a rise in exports, which is not a good sign.

“Our concern is that the inventory building is increasingly involuntary rather than planned—consumer demand is softening at a time when improved supply chains have boosted the stock of products available,” analysts at ING said in a note.

“Likewise, the improvement in net trade is down to imports falling (a sign of a weakening US demand outlook) rather than exports rising—exports fell 1.3%. So, to sum up, we have good growth but not for great reasons,” they added.

Consumer spending grew 2.1 percent but demand for long-lasting manufactured goods, which are mostly bought on credit, fizzled.

Stripping out inventories, government spending, and trade, U.S. domestic demand increased at only a 0.2 percent rate. That was the smallest increase in private domestic final sales since the second quarter of 2020 and was a deceleration from the third quarter’s 1.1 percent pace.

Also, while the December durable goods report showed a 5.6 percent jump month-over-month, this was led by aircraft orders. Excluding transport, orders fell 0.1 percent, while non-defense capital goods orders excluding aircraft, which is a measure closely tracked by the Federal Reserve as a proxy for capital expenditures by businesses, fell by a monthly 0.2 percent in December.

“So again, the details paint a very different picture to what looking at the headline alone would suggest—remember too it isn’t as if Boeing can suddenly magically make all these planes this year,” ING analysts said.

Further, non-residential fixed investment, which is also a proxy for business capital expenditures, plummeted at an annual rate of 26.7 percent.

But one data point in particular was stunning when seen in a historical context.

‘Most Troubling’

Included as a supplement to the GDP report was a historical comparison data set (pdf), which showed that disposable personal income in 2022 fell by 6.4 percent compared to a year prior. That’s the sharpest decline in the measure since the Great Depression, when disposable personal income plummeted 13.1 percent in 1932.

“The most troubling information in the GDP report is the precipitous drop in real disposable income, which fell over $1 trillion in 2022,” E.J. Antoni, a research fellow at the Heritage Foundation, wrote in an op-ed.

Such a sharp decline in disposable personal income doesn’t bode well for the U.S. economy going forward as it could mean a pullback in consumer spending.

“Consumer spending—the economy’s main growth engine—is expected to weaken as income growth softens and households can no longer rely on excess savings to maintain their desired pace of spending,” economists at Oxford Economics said in a note.

Consumer spending is a key driver of the U.S. economy, accounting for around 70 percent of economic growth.

“The U.S. economy isn’t falling off a cliff, but it is losing stamina and risks contracting early this year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Looking ahead to the first quarter, the CEIC GDP Nowcast projects that the U.S. economy will grow just 0.4 percent.

The Conference Board anticipates that the United States will endure three consecutive quarters of negative real GDP growth beginning this quarter.

“However, this downturn will be relatively mild and brief, and growth should rebound in 2024 as inflation ebbs further and the Fed begins to loosen monetary policy,” the Conference Board said in a report.

For the upcoming year, S&P Global forecasts a GDP growth rate of negative 0.1 percent in 2023.

One positive data point from Thursday’s GDP report is that inflation eased in the fourth quarter, with a measure of inflation rising 3.2 percent, down from the 4.8 percent notched in the prior quarter.

But a tight labor market, as evidenced by a drop in the number of weekly jobless claim filings to its lowest level since April 2022, suggests that wage pressures remain high and, with them, upward pressure on inflation.

Andrew Moran and Reuters contributed to this report.