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The US economy likely slowed but still posted solid growth in Q4

WASHINGTON (`) – The U.S. economy likely emerged from 2022 with momentum, posting decent growth amidst painful inflation, high interest rates and mounting concerns that a recession could be months away.

Economists have estimated that gross domestic product — the broadest measure of economic output — grew 2.3% annually from October to December, according to a survey of forecasters by data firm FactSet.

The Commerce Department will release its first of three estimates of fourth-quarter GDP growth Thursday at 8:30 a.m. Eastern time.

Despite a likely second straight quarter of expansion, the economy is widely expected to slow and slide into recession sometime in the coming months as ever-higher interest rates being orchestrated by the Federal Reserve take their toll. The Fed’s rate hikes have pushed up the cost of borrowing for consumers and businesses, from mortgages to car loans to corporate loans.

The housing market, which is particularly vulnerable to higher lending rates, has been hit hard, with existing home sales falling for 11 straight months. Investment in residential construction fell at an annual rate of 27% from July to September.

And consumer spending, which drives around 70% of the overall economy, is likely to soften in the coming months along with the still-resilient labor market. The resilience of the labor market came as a big surprise. Last year, employers created 4.5 million jobs, second only to the 6.7 million created in 2021 in state records dating back to 1940. And the unemployment rate last month hit a 53-year low of 3.5%.

But the good times for America’s workers are unlikely to last. As higher interest rates make it increasingly expensive to borrow and spend across the economy, many consumers will spend less and employers will likely hire less.

Last year, the Fed raised interest rates seven times in unusually large increments to try to stem consumer price inflation. Another Fed rate hike, albeit a smaller one, is expected next week.

The central bank has reacted to an inflation rate that remains stubbornly high, although it is beginning to ease. Annual inflation in June was 9.1%, the highest level in more than 40 years. It has since slowed to 6.5% in December, but is still well above the Fed’s 2% target for the year.

Another threat to the economy this year is politically rooted: House Republicans may refuse to raise the national debt ceiling if the Biden administration rejects its call for sweeping spending cuts. Not raising the credit limit would prevent the federal government from paying all of its obligations and could shake its creditworthiness.

Moody’s Analytics estimates that the resulting upheaval could wipe out nearly 6 million American jobs in a recession similar to the devastating one triggered by the 2007-2009 financial crisis.

At the very least, the economy is likely to start the year on firmer footing than at the beginning of 2022. Last year, the economy shrank by 1.6% annually from January to March and by a further 0.6% from April to June. These two consecutive quarters of economic contraction raised fears that a recession may have begun.

But the economy regained strength over the summer, buoyed by resilient consumer spending and higher exports. It expanded at a stronger-than-expected annual pace of 3.2% from July to September.

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