Even though higher borrowing costs and rising living costs slowed growth, the US economy did better than expected at the end of last year.
According to official numbers, the US economy grew at an annual rate of 2.9% in the last three months of 2022.
That was less than the 3.2% in the previous quarter because home sales and buildings fell.
Even though the job market has been stable, some analysts are worried that the US economy is heading for a recession.
The unemployment rate is close to a record low, but other parts of the economy are getting worse.
Even though December is usually a big shopping month, retail sales dropped 1.1% from November to December.
The economy has also hurt manufacturing, and the stock market dropped sharply last year.
According to a report on Thursday, housing investment, which is affected by interest rates, fell at an annual rate of almost 27% in the three months leading up to December. This happened because fewer new homes were being built.
But consumer spending, the main thing that keeps the US economy going, kept going at a steady, if slower, pace.
For the whole year, the economy grew by 2.1%. However, after the pandemic, the economy grew by 5.9% last year, which was the fastest rate since 1984.
Prices went up quickly because of this rise, so the US central bank had to act to keep prices stable.
Last year, the Federal Reserve raised interest rates from nearly zero to more than 4%, the highest rate in 15 years.
The bank hopes that people will save more and spend less by making it more expensive to borrow. This will help keep prices from going up too quickly. But it could slow things down so much that millions of people would lose their jobs.
More news has come out about job cuts. This week, many lost their jobs at large companies like 3M, Dow, IBM, and SAP. On the other hand, some, like the Chipotle chain of restaurants, are hiring more people.
Fed officials have said that they still hope the economy can change without causing a lot of people to lose their jobs. But this would mean their plan to raise interest rates might end with a “soft landing.”
“Since almost a year ago, the Federal Reserve has been working toward a “soft landing” by raising short-term interest rates just enough to lower inflation without starting a recession. Even though the Fed is trying to help the economy, it is still doing pretty well, so they’re doing a good job. Richard Flynn, the head of Charles Schwab UK, said this.
“However, investors may worry that today’s numbers don’t tell the whole story because other recent data points to a recession.”
Will the rest of the world be affected if US inflation goes down?
All over the world, the cost of living has gone up because of the US economy. Now that price inflation in the country is slowing down, should the rest of the world do the same?
Inflation started in the US before it did in any other major global economy. This happened when the government gave out a lot of money to help people during a pandemic, which made a lot of people spend more money and do more things.
Soon, prices went up all over the world. Strong demand from American buyers drove up the price of oil and other necessities, global shipping companies raised their fees, and companies with shortages raised their prices.
Then, when the US central bank started raising interest rates to fix the problem, a lot of money rushed into the country. This made the dollar go to its highest level in 20 years and caused prices in other countries to go up even more.
The sudden rise in living costs was caused by more than just the US economy. The war in Ukraine also played a big role, especially in Europe, where it cut off food supplies and messed up the energy markets.
Still, analysts say that if America’s inflation problem is getting better, that’s good news for the rest of the world, especially if it means the central bank can stop fighting so hard and let exchange rates stabilize.
US economy and the dollar effect
In 2022, the key interest rate set by the US central bank was raised to its highest level in 15 years. The same thing happened in many other countries.
The bank tried to stop things like business growth and spending on homes and cars by making it more expensive to borrow money. This drove up prices and in turn the US economy.
But it said last month that it would take a bit of time to raise rates. Officials want to keep the economy from slowing down and are betting that most of their work is done.
Analysts say that the policy change should help the rest of the world, which has been dealing with the bank’s actions that have caused the dollar’s value to rise in the past.
Even though the Fed says it will slow down its rate hikes, it is still hard to know what will happen next.
The bank thinks US inflation will drop to about 3% by the end of 2023, but Prof. Dominguez says this prediction “seems quite optimistic.”
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For now, the US job market is still strong, and workers are pushing for higher wages, which could increase prices in the future.
If the Fed has to be stricter than expected, it could affect exchange rates and the cost of borrowing in other countries because other central banks will feel pressured to do the same.
