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U.S. economy slowed more than initially thought last quarter, growing at 2.7% rate

The U.S. economy expanded at a 2.7% annual rate from October through December, a solid showing despite rising interest rates and elevated inflation, the government said Thursday in a downgrade from its initial estimate.

The government had previously estimated that the economy grew at a 2.9% annual rate last quarter.

The Commerce Department's revised estimate of the fourth quarter's gross domestic product — the economy's total output of goods and services — marked a deceleration from the 3.2% growth rate from July through September.

Thursday's report also revised down the government's estimate of consumer spending growth in the October-December quarter, from a 2.1% rate to 1.4%. That was the weakest such showing since the first quarter of last year. Business spending also slowed in the fourth quarter, suggesting that the economy lost momentum at the end of 2022.

"[T]he revision confirms that, although the U.S. economy is still growing, it is losing steam. The slowdown in fourth-quarter growth was mainly driven by a deceleration in private consumption and both household and business investment," Cailin Birch, global economist at the Economist Intelligence Unit, said in an email.  "This fits with our view that U.S. real GDP growth will slow noticeably over the course of 2023, to show marginal real growth in year-on-year terms."

More recent data, though, shows that the economy has since rebounded. Consumers boosted retail sales in January by the most in nearly two years, and employers added a surprisingly outsize number of jobs in December and January. The unemployment rate reached 3.4%, the lowest level since 1969.

Some of the surprisingly strong economic gains in January — including surging job creation and higher-than-expected retail sales — likely reflected warmer-than-usual weather in the new year. Few economists expect similar outsize gains in hiring or spending in the coming months, with most expecting growth to slow to a roughly 2% annual rate in the current January-March quarter.

And the Federal Reserve is expected to keep raising its benchmark interest rate over the next few months and to keep it at a peak through year's end to try to defeat still-high inflation. Minutes from its last policy meeting released Wednesday showed that all 19 Fed officials favored raising rates at the next two meetings.

Higher interest rates still expected

"From the Fed's perspective, a slowdown in the economy is anticipated and will be welcome news," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, a consulting firm. "However, even as growth slows, a focus on lowering elevated inflation means rates will move up further and will remain higher for longer."

Higher borrowing costs make mortgages, auto loans and credit card borrowing more expensive. Those higher rates could discourage consumers and businesses from spending, hiring and investing and could eventually push the economy into a recession.

The economy's growth at the end of 2022 reflected mainly a restocking of inventories, which will likely unwind in coming quarters, and a pickup in government spending. Housing investment fell nearly 26%. Higher borrowing rates have crushed homebuying and recently led to a drop in housing prices.

Inflation, measured year over year, has cooled since it reached 9.1% in June, having slowed to 6.4% in January. Yet on a monthly basis, price gains accelerated from December to January, raising the prospect that the Fed will raise its benchmark rate higher than it has previously signaled.

In Thursday's GDP report, the government also sharply revised up its estimates of Americans' incomes in the fourth quarter. After-tax income, adjusted for inflation, jumped 4.8%, a much larger gain than the previous 3.3% estimate.

The upward revisions reflected higher wages and salaries than was estimated earlier and state stimulus payments that were intended to offset inflated costs of gas, food and other necessities. Twenty-one states, including California, Colorado, Florida, New York, Idaho and Pennsylvania issued one-time payments last year, typically in the form of tax refunds.

The boost in incomes could continue to support consumer spending this year and might have helped drive up retail sales in January. If so, stronger consumer spending could force the Fed to continue raising rates or keep them elevated for longer to cool the economy and quell inflation.

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