The US closed out 2022 with its economy still growing despite recession fears

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Shoppers wait in line at a Publix in Nashville, Tennessee, on December 22, 2022. SETH HERALD/AFP via Getty Images

US gross domestic product grew at an annualized rate of 2.9% in the fourth quarter of 2022.
That follows the third quarter’s growth of 3.2% and beats a forecast from economists.
The US closed out 2022 with cooling inflation, economic uncertainty, and concerns about when a recession may happen.

The US ended 2022 with a robust quarter of economic growth.

Data out Thursday from the Bureau of Economic Analysis shows that the economy saw a second consecutive quarter of growth. The US economy’s gross domestic product grew at an annualized rate of 2.9% in the fourth quarter of 2022, according to the advance estimate. That’s slightly above the forecast of 2.6% from economists surveyed by Bloomberg.

Elon Musk says we’re in a recession. Here’s what Wall Street thinks.

Elon Musk said at a conference Monday he believed the US is probably in a recession.
US GDP shrunk last quarter, and two contractions in a row typically marks a recession.
Wall Street firms are split on the prospect of whether the US will tumble into one.

Americans are feeling the weight of inflation — and the biggest financial firms are at a crossroads about whether that means a recession is coming.

Elon Musk is more certain. At a Miami “All In” tech conference on Monday, the Tesla founder posited that the US is already in a recession that he believes could last anywhere from a year to 18 months.

“Recessions are not necessarily a bad thing,” he said via video. “I’ve been through a few of them. And what tends to happen is if you have a boom that goes on too long, you get a misallocation of capital. It starts raining money on fools, basically.”

Musk isn’t an expert, but he’s joining a chorus of others sounding the alarm on a pending recession — which the National Bureau of Economic Research defines as a widespread, months-long decline in the economy. After all, getting food on the table is more expensive. So is putting gas in the tank. The highest inflation in 40 years has a domino effect on the housing market as well, meaning that buying a home is getting increasingly prohibitive.

This pressure has bled into the most widely monitored measure US economic growth — gross domestic product — which shrank in the first quarter for the first time since the start of the pandemic.

With all that going on, it’s difficult for many to feel optimistic about the state of the economy.

“People are noticing the higher prices, and that in many cases, their wages aren’t keeping up,” Tara Sinclair, an economics professor at George Washington University, told Insider.

Several economists told Insider that current inflationary problems are a bump in the road that low and middle-income Americans are reasonably equipped to withstand, pointing to data that shows Americans’ finances are actually keeping up with rising costs. There are also plenty of jobs to go around, with the labor market’s recovery holding strong. And Americans are still spending, with the savings they amassed during the pandemic still helping to keep the economy afloat.

All that extra cash is one thing Musk is blaming for the economic downturn.

“The obvious reason for inflation is the government printed a zillion amount of more money than it had,” he argued. “The government can’t just issue checks for an excessive revenue without there being inflation.”

And some financial professionals have painted a dar picture, with multiple large firms forecasting an imminent recession. On the whole, Wall Street is divided.

On one side of the aisle is Bank of America and Deutsche Bank, which say the US is certain to plunge into recession. Opposite them are JPMorgan and UBS, who acknowledge that economic pressures will persist, but don’t think a full-on recession is coming.

Here’s a more detailed look at what each of the four firms are forecasting:

Bank of America

An “inflation shock” will cause a recession in 2022, as well as an equity bear market, according to Bank of America researchers.

“Inflation causes recessions,” BofA said last month, and right now, inflation is “out of control,” according to the note.

Nearly all prior recessions have been preceded by inflation surges, the researchers noted, including in the late 1960s, early 1970s, and in 2008. “Last dominoes to drop in terms of recession expectations is higher yields and weaker dollar,” they said.

Bank of America predicts that a “rates shock” — when the value of one currency spikes in relation to another in an short period of time — will follow the ongoing inflation shock, which will ultimately lead to a recession.

The analysts add that the recession will cause the S&P 500 to fall below the key 4,000 level by the end of 2022, they said.

Deutsche Bank

Deutsche Bank is in agreement with Bank of America: a recession is likely, except their timeframe is by the end of 2023. And the firm’s researchers predict that the trigger will be the Fed hiking interest rates above 5%.

The bank’s economic researchers, led by global head David Folkerts-Landau, said in a recent note that — in order to stamp down on inflation — the central bank will have to raise the federal funds target rate much higher than the 3% currently expected by many analysts.

“We will get a major recession, but our strongly held view is that the sooner and the more aggressively the Fed acts, the less longer-term damage to the economy there will be,” they said.

The economists argued that inflation will continue to surge past expectations due to the hot labor market and supply-chain issues, pushing the Fed to act.

“We assume conservatively that a fed funds rate moving well into the 5% to 6% range will be sufficient to do the job this time,” they wrote.

JPMorgan

JPMorgan researchers said in March that a near-term recession is unlikely, despite also forecasting continued financial pressures on US households. After the recent GDP contraction, they maintained their original stance that the US will avoid a prolonged slowdown.

“The Fed is going to fight inflation this year and likely into next, but there are many other ways for inflation to fall regardless of what happens to interest rates,” Jacob Manoukian, head of investment strategy, said in a note, arguing that the signs are pointing to weaker consumer-good prices over the course of the year, “which means inflation could soon look much more tolerable.”

Manoukian also said that both businesses and consumers in the US and Europe have historically healthy balance sheets, and said that current household debt growth is likely temporary, showing that people are building debt after months of erasing it. He pointed to high current corporate profit margins as well, saying that if they began to decline, the forecast would lean more strongly toward a recession.

“The data from JPMorgan showed that on average, people in the bottom quintile have more money in their bank accounts than before the pandemic,” Dean Baker, a co-founder of the Center for Economic and Policy Research, told Insider. “Also, wage growth has been fastest in lower paying jobs, far outstripping inflation.”

UBS

UBS and JPMorgan researchers are in agreement about a recession looking unlikely.

Matthew Mish, head of credit strategy at UBS, told Insider that the savings that Americans accrued during the pandemic is one reason that inflation isn’t going to overwhelm households. He also said that growing bargaining power for service-sector workers and increased debt likely being temporary are other reasons to be reassured.

Mish and his team noted last month that consumer sentiment remains “bearish,” underscored by depressed attitudes for homebuying and auto purchases due to high inflation. Weakness in sentiment has been a consistent indicator of recessions in prior cycles, but he said that it’s misplaced here.

“While concerns around the impact of higher inflation on lower socioeconomic (SES) groups are elevated, the CFS results suggest the reality may be less alarming,” the UBS researchers wrote.

And even amid last quarter’s GDP contraction, UBS is fairly confident we won’t see a recession, pointing to “solid” US earnings, and to the Fed, which UBS says is unlikely to induce a recession with the prospect of falling inflation. They disagree with Deutsche Bank and Bank of America’s prediction, which is that inflation will continue to surge.

“Our base case is that inflation is likely to fall from current levels but remain above pre-pandemic ranges,” the UBS editorial team wrote this week. “We expect growth in 2022 to be slower than last year, but not tip over into recession. Our view remains that the right strategy is to position for inflation — a clear and present fact — rather than recession, which is still only a future possibility.”

5/5 SLIDES

The fourth quarter print means that the US economy saw a small slow down from the third quarter’s annual rate of 3.2%. While the US closed out 2022 with GDP rising, GDP shrunk in the first two quarters of 2022.

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Imports and exports both fell in the last quarter of 2022, with seasonally adjusted annual rates of -4.6% and -1.3% respectively. The fourth quarter print is good news for those who think a recession can be avoided, which some experts believe could be the case.

The US saw inflation as measured by the Consumer Price Index slow month after month, based on year-over-year changes, in the months part of the last quarter of the year. And annualized three-month changes shows that inflation could actually be slowing down even faster.

Overall, GDP grew at an annual rate of 2.1% in 2022, which is much lower than the economic growth from a year prior. GDP climbed at an annual rate of 5.9% in 2021.

Different areas of the economy contributed to the positive growth in 2022, including consumer spending.

“The increase in real GDP in 2022 primarily reflected increases in consumer spending, exports, private inventory investment, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and federal government spending. Imports increased,” Thursday’s release from the Bureau of Economic Analysis stated.

This is a developing story. Please check back for updates.