Real GDP (Q4-2022, second release)

Thomas Feltmate, Director & Senior Economist | 416-944-5730

Date Published: February 23, 2023

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Fourth quarter growth appeared strong on the surface, but underlying details remain soft  

  • The second estimate of fourth quarter real GDP expanded by 2.7% quarter-over-quarter (q/q, annualized) – a slight downward revision from the 2.9% reported in the Bureau of Economic Analysis's advance estimate. 
  • Consumer spending growth was revised down from 2.1% in the advance estimate, to 1.4%. Gains were entirely concentrated in services (+2.4%), while goods spending was revised down, recording a modest pullback (-0.5%). Spending on durables goods (-1.8%) was lower on the quarter, while non-durables (+0.2%) were flat. 
  • Non-residential investment (+3.3%) saw an upgrade (previously +0.7%), which was largely due to stronger growth in non-residential structures (+8.5%) and intellectual property products (+7.4%). Equipment expenditures (-3.2%) remained soft.
  • Residential investment fell 25.9% and shaved 1.2 percentage points (pp) from headline growth. 
  • Government spending expanded by 3.6%, with gains seen at both the federal (+5.9%) and state & local (+2.3%) level. 
  • Both exports (-1.6%) and imports (-4.2%) were lower on the quarter, though a stronger pullback in the latter meant net exports added 0.5pp to economic growth. 
  • Inventory investment made an outsized contribution to fourth quarter growth, adding 1.5pp – the largest quarterly contribution since 2021-Q4. 
  • The BEA also included revised estimates for third quarter Gross Domestic Income (GDI), with Q3 GDI now estimated to have expanded by 2.8% (as opposed to the previously reported 0.8%).          

Key Implications

  • The second estimate of fourth quarter GDP showed the U.S. economy having ended last year on a slightly softer footing, with the bulk of the downward revisions concentrated in consumer spending. While GDP still appeared to expand at an above trend pace, nearly three-quarters of the gains were concentrated in net exports and inventory investment, which continue to experience distortions as supply chains normalize. Meanwhile, private sales to domestic purchasers – the best gauge of underlying domestic activity – was flat in the fourth quarter.    
  • Looking into the first quarter of this year, we expect consumer spending to remain somewhat resilient. The labor market remains incredibly hot, which is helping to fuel both household incomes and consumer confidence and should keep spending humming somewhere closer to last quarter's pace of growth. However, this cannot be sustained indefinitely. We suspect the labor market will soon start to cool, helping to curb domestic activity and lead to a more meaningful slowdown in economic growth. Our current forecast assumes the U.S. economy will expand by somewhere close to 1% in each of the next two-years, which his roughly half the pace of growth seen in 2022.