U.S. economy expands at a faster-than-expected 2.9% pace

The U.S. economy expanded at a healthy pace in the fourth quarter, though an extended salvo of Federal Reserve interest-rate hikes is seen jeopardizing growth prospects this year.

Gross domestic product increased at a 2.9% annualized rate in final three months of 2022 after a 3.2% gain in the third quarter, the Commerce Department's initial estimate showed Thursday. Personal consumption, the biggest part of the economy, climbed at a less-than-forecast 2.1% pace.

Median projections in a Bloomberg survey of economists called for a 2.6% rise in GDP and a 2.9% advance in spending. About half of the GDP increase reflected inventory growth, while government spending matched the biggest gain since early 2021.

The report also showed some signs of stress for American consumers whose wages have failed to keep up with inflation and continued to encourage them to draw down savings accumulated from government pandemic-relief programs. The burden of elevated prices and higher borrowing costs is mounting, pointing to a tenuous outlook for the economy.

The latest Bloomberg monthly survey shows economists see the economy shrinking in the second and third quarters, putting 65% odds on a recession in the coming year.

Recent data show cracks are developing more broadly. Retail and motor vehicle sales data showed households are starting to retrench, the housing market continues to weaken and some businesses are reconsidering capital spending plans. 

As the Fed continues to hike interest rates to ensure inflation is extinguished, housing and manufacturing have deteriorated quickly while industries including banking and technology are carrying out mass layoffs. 

The GDP report showed the personal consumption expenditures price index, a key inflation metric for the Fed, rose at an annualized 3.2% rate in the fourth quarter, down from a 4.3% pace in the prior three months. The core index that excludes food and energy climbed at a 3.9% rate compared with 4.7% paces in the prior two quarters. Monthly data for December will be released Friday.

The moderation in price pressures is consistent with forecasts that the Fed will further scale back its tightening campaign next week, when it's expected to raise rates by 25 basis points. Policymakers boosted the benchmark rate by 50 points in December after 75 basis-point hikes at their previous four meetings.