March 23, 2023

The U.S. economy grew at a healthy clip in the final months of 2022. But forecasters expect slower growth this year, as the Federal Reserve continues to crack down on inflation.


Here is the good news from the latest report card on the U.S. economy. It ended last year in better shape than many people expected, and that is largely because people kept spending money in spite of rising prices. But the not-so-good news is this. Forecasters say that resilience is not likely to last. Inflation is starting to take a toll on people’s spending habits. And the Federal Reserve’s efforts to fight inflation are putting a big dent in the housing market. NPR’s Scott Horsley is here to explain all. Hey, Scott.


KELLY: Start with what we know for sure. What does the new GDP report tell us about the economic growth that already happened in the final three months of 2022?

HORSLEY: Yeah. The economy grew at an annual pace of 2.9% in the fourth quarter. That is down a little bit from the previous three months, but it’s still pretty good. In fact, it’s well above the average growth rate we saw during the decade-long expansion leading up to the pandemic. It’s also a big improvement from the first half of last year, when, you might remember, the economy actually shrank.

KELLY: Yeah.

HORSLEY: Mark Zandi, who is the chief economist at Moody’s Analytics, says after that tough start to 2022, the economy found its footing in the second half of the year. And we actually ended the year with an economy about 1% larger than it was 12 months earlier.

MARK ZANDI: Weak in the grand scheme of things but pretty darn good in the context of a pretty tough year with the Russian invasion of Ukraine spiking energy prices, record gasoline prices in the middle of the year and, of course, the Fed jacking up interest rates very aggressively.

HORSLEY: The Federal Reserve has raised interest rates seven times in the last 10 months as it tries to curb inflation. And that effort is working. Inflation is coming down. But, of course, those higher borrowing costs are also likely to produce slower economic growth this coming year.

KELLY: And are we already seeing signs of that?

HORSLEY: You can definitely see it in the housing market. Home sales and new home construction have dropped off sharply as a result of higher mortgage rates. Housing was a big drag on GDP at the end of last year. Consumer spending, which is the biggest driver of the economy, has held up relatively well. But you are starting to see some cracks there as well. You know, for a while, people were able to shrug off higher prices and maintain their spending by dipping into savings or leaning more heavily on their credit cards. But you start to see a real slowdown at the end of last year. Nikki Moore works for an insurance company in Florida. She and her husband have pretty good incomes, but she says once they pay their basic bills every month, there’s just less money left over for little luxuries.

NIKKI MOORE: Our electric bill – holy Moses. Things like that we have to budget for, whereas before I was like, OK. I paid the electric bill, and we have some money left over. I take the kids to the movies, or we go to McDonald’s or something like that. But I’m like, yeah, that money’s being eaten up just for the basic need.

HORSLEY: As a result, people are starting to spend a little less freely. Consumer spending was pretty robust in October, but it started to lose steam in November and December.

KELLY: OK, so crystal ball moment. What does all that tell us about what we may be in store for this year?

HORSLEY: We are likely to see a further slowdown in growth. A lot of forecasters worry the economy could slip into recession. Zandi thinks we will narrowly avoid that and the economy will keep growing just very slowly. Some would call that a soft landing, although Zandi doesn’t like that phrase.

ZANDI: This isn’t going to be soft. You know, we may land without a recession. I think that’s more than likely, but it’s going to feel very, very uncomfortable. Not a recession – we’re not going backwards, but we’re not going anywhere fast.

HORSLEY: Whether we slide into recession or not, 2023 looks like a challenging year for the economy. On the plus side, we do have a very strong job market. Unemployment’s at a half-century low, so we’ll see how long that lasts.

KELLY: Thank you, Scott.

HORSLEY: You’re welcome.

KELLY: NPR’s Scott Horsley.

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