Closing out 2022

While 4th quarter GDP exceeded expectations, underlying economic growth appears to be slowing

February 01, 2023
  • Ryan Severino
  • 4Q GDP beats expectations

  • Underlying economic growth slowing

  • Inflation continues to decelerate

  • Fed set to hike 25 basis points

  • CRE slowing with the economy

The economy closed out 2022 with solid growth, providing some momentum heading into 2023. While it did rebound from a technical contraction in the first half of the year, it generated growth in the latter half. Net, that brings GDP to its highest level ever. Yet underlying growth is clearly slowing. Consumer spending contracted during the last two months of 2022 and both the manufacturing and services sectors are showing tentative signs of contraction. What does it all mean?

4Q is fine

The economy grew by 2.9% during the fourth quarter. Although that represents a slowdown from third quarter’s growth of 3.2%, it still exceeded expectations. Growth occurred broadly with consumption expanding by 2.1%, slightly slower than the third quarter, despite high inflation and higher interest rates. Private investment rebounded after contracting for a couple of quarters but grew more slowly than consumption. Within investment, spending on nonresidential structures grew for the first time since the first quarter of 2021. Although spending on equipment fell, spending on intellectual property continued to expand and has not contracted since the second quarter of 2020. Meanwhile, spending on residential structures continued its difficult run, falling for the 7th consecutive quarter and by double digits for three consecutive quarters. Government spending increased across all major subcategories. Overall, the data indicate that spending in the economy is slowing, and more recent data points indicate that further slowing lies ahead in 2023.

Yet, unlike typical downturns, the slowing paints a mixed picture. On the pricing side, inflation continued to decelerate. The personal consumption expenditures (PCE) index, the Fed’s preferred measure, showed continued slowing in December. Both the headline and core PCE indexes continued to decelerate on a year-over-year basis. Along with recent observations from the consumer price index and the producer price index.


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...confidence is growing that inflation has passed its peak and looks set to decelerate further in 2023.

Durable goods spending proves…durable

Durable goods orders for December far exceeded expectations, growing by a brisk 5.6% versus November. Transportation orders drove the gain: orders excluding transportation declined slightly, although those also exceeded expectations. Moreover, over time orders and shipments are declining. That reflects both the relative shift of consumers from goods back to services and the impact of higher interest rates. We expect the slowing to continue in 2023 with interest rates set to remain elevated and the continued slow reversion of spending patterns back to pre-pandemic norms.

Jobless claims say…

Jobless claims fell to 186,000 during the most recent week, down from the prior week and the lowest level since April 2022. Yet this data doesn’t seem to agree with increasing announcements about layoffs that are becoming more frequent. What gives? Some potential explanations for this seeming discrepancy exist. First, some layoffs are just announcements for future events because in some locations companies are required to give advance warning for mass layoffs. Second, some of the layoffs are occurring outside the U.S. Third, some people are quickly getting rehired and not filing for unemployment claims. Fourth, some of the job losses are among visa holders who are not filing. We expect claims to tick higher as some announcements turn into actual layoffs and companies come under further stress from higher rates and more troublesome business prospects.

Fed Watch

Against that relatively favorable background, the Fed is going to meet this week. We expect the Fed to raise rates 25 basis points (bps). The Fed signaled to the market that slowing inflation, along with other slowing economic trends, warranted a slowing in the pace of rate hikes. The Fed could also signal that it is getting close to the end of this hiking cycle and potentially provide some guidance on the terminal rate and duration until rate cuts would begin.

What it means for CRE

As a procyclical asset class, commercial real estate (CRE) tends to follow the overall business cycle. While fourth quarter’s growth rate represents relatively positive developments, CRE’s current performance is generally reflecting the overall slowing trend. With the economy poised to slow further in the coming quarters, expect a slowdown in property fundamentals. That does not explicitly portend doom and gloom, but a change in expectations seems warranted. Hot sectors and subtypes are cooling. Struggling sectors and subtypes face a much more challenging future because they are facing an economic slowdown without having fully recovered from the prior recession in 2020. The puts them in the unenviable position of facing downturns in relatively quick succession for the first time since the early 1980s.

Thought of the week

According to a study, 80% of Gen Z considers a company’s sustainability and social impact before making a purchase.

Contact Ryan Severino

Chief Economist, JLL