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The Line: Economic Growth Better than Expected in 4Q22

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

Economic Growth Better than Expected in 4Q22

See, I’m confusing you right from the start. I bet you’re saying to yourself, "I thought Greg said the economy is slowing, now he says it’s growing faster than expected. What’s wrong with him?"

Fair question, but before I explain myself, let’s look at the details of last Thursday's GDP report.

The U.S. economy grew at a 2.9% annual pace in the fourth quarter, higher than the 2.6-2.8% rate economists were expecting. The biggest contributor to economic growth was a buildup of inventories, which accounted for roughly half the increase in GDP. If you were fortunate enough to take macroeconomics at some point, you may remember the formula for calculating GDP:

GDP = C + I + G + (X – M)

C = Personal Consumption

I = Investment, which includes inventories

G = Government Spending

(X-M) = Net exports

It’s good that GDP is rising, but it can be just as important to see where the growth is coming from. While consumers kept spending at a decent annual rate last quarter (+2.1%), getting half your growth from an increase in inventories is concerning. That’s because once inventories are built up, they won’t be expanded again for some time.

Before I get too boring, let’s get back to explaining why the decent GDP number doesn’t contradict what I’ve been saying about the economy lately.

Here are my reasons:

  • Much like closed sales in real estate, GDP is a lagging indicator. It’s the past, and as those investment commercials always say, "past performance is not indicative of future results."

  • The most recent data for retail sales, homebuilding, and both the manufacturing and services industries have all been negative. Retail sales—which are important since consumer spending accounts for 70% of GDP—declined by more than expected in November and December. Not a good sign for first quarter 2023 GDP.

  • Inflation has come down from its peak in June, but it’s still too high and continuing to outpace wage gains.

  • The Federal Reserve will probably hike rates twice more before stopping. The cumulative impact of the steep hikes since last March will continue to put the brakes on the economy. While the Fed’s goal has always been to calm inflation without causing a recession, it’s very unlikely they can pull it off.

Sorry to be a bummer, but while it’s nice the economy grew faster than expected last quarter, don’t expect that to continue this year. I’m not saying we’re headed for a prolonged deep recession, but economic growth will turn negative at some point this year.

You can read the full report on GDP at this link.

Mortgage Rates Fall to Lowest Level Since September

According to Freddie Mac, 30-year conforming rates are now averaging 6.13%, their lowest level since mid-September—no, not the 21st night of September for you EWF fans—and the third straight weekly decline. Perhaps more impressive is that since peaking in early November at 7.08%, rates have fallen almost a full percent. I know some of you will say "that’s nice, but what about jumbo rates?" See this chart to learn more. The recent decline in rates helped fuel a 7% increase last week in mortgage applications, according to the Mortgage Bankers Association. It also helped bring new home sales up for the third straight month in December. Unlike existing homes, new home sales are counted when the contract is signed, so it presents it good real-time indicator of demand. With lower rates and declining prices in some markets, there’s a big sale on real estate right now. As inflation continues to come down, expect rates to keep heading lower. And remember, rates are already lower than they were in 2007.

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