US GDP rises higher than expectations
Economists had anticipated a 2.6% increase for the quarter. However, despite outperforming expectations, growth still slowed from 3.2% in the third quarter.
Several commentators said this bolsters the Federal Reserves claim the economy is more robust than expected and the Federal Reserve’s attempt to achieve a soft landing through raising interest rates is succeeding.
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Since March, the US central bank had raised interest rates by more than 4 percentage points, moving at 0.75 percentage points at a time.
“GDP growth of 2.9% in the final quarter of 2022 dramatically exceeded expectations, making economists’ forecasts of a 2023 recession appear increasingly improbable,” said Hugh Grieves, fund manager at Premier Miton.
“The American consumer’s robust demand for services following Covid lockdowns continues apace, supported by unprecedented savings accumulated through the pandemic combined with an employment market that shows no signs of weakening in the face of continued interest rate rises by the Federal Reserve.”
However, not all investors are convinced.
Richard Flynn, managing director of Charles Schwab, pointed out that GDP numbers were “somewhat deceiving”, as other data has pointed to a recession.
Figures from corporates has been mixed this week. Microsoft has said it was seeing a more cautious approach to spending, while Tesla was slightly ahead of expectations.
There also have been significant job cuts from US companies including Amazon, Meta, Disney and some of the banks. A survey from the National Association for Business Economics showed that 20% of its members anticipate employment at their companies to fall over the coming months.
“While Fed officials have signalled they plan to ‘hike and hold’ rates at high levels to ensure inflation recedes, the market seems doubtful,” said Flynn. “In fact, investors are already pricing-in cuts to the federal funds rate target in the second half of 2023. This mismatch in expectations may drive volatility in the months ahead.”
The Federal Reserve is scheduled to meet next week (1 February) and is anticipated to raise rates by 25 basis points.
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However, Robert Alster, CIO at Close Brothers Asset Management pointed out that US companies tend to downsize quicker and faster than elsewhere across the globe as they look to protect profits.
“This is what we will be keeping in mind with US personal spending data out on Friday, which we think will be in line with expectations albeit softer than November,” said Alster. “As the year rolls on we expect inflation and interest rates to reduce which will provide a fillip to consumer spend in the second half.”
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