The U.S. economy avoided a recession in 2022 because of ‘shockingly’ resilient consumers—but they’re just about spent

But despite the pessimism, U.S. gross domestic product (GDP) rose at a 2.9% annualized rate in the fourth quarter, the Bureau of Economic Analysis reported Thursday. That’s a slight slowdown from the 3.2% GDP growth seen in the third quarter, but still well above FactSet consensus expectations for 2.3%. And experts say it’s far from evidence of a recession—especially when coupled with the 3.5% unemployment rate.  

“The U.S. economy continued to expand at a robust rate in the fourth quarter,” John Leer, chief economist at decision intelligence company Morning Consult, told Fortune, arguing that “most of that growth was fueled by a shockingly resilient consumer.”

However, Leer noted that although steady consumer spending in the face of 40-year-high inflation allowed the U.S to avoid a recession in 2022, he has “started to see that resilience wane more recently.” 

“Consumers are increasingly struggling to navigate the ongoing effects from the spike in prices last year by drawing on credit and savings,” he said. “With consumer demand likely to continue its downward trajectory, business investment is also likely to slow in the coming quarters, increasing the probability of a recession this year.” 

Consumers’ strength is fading—but is a recession inevitable?

U.S. consumers built up $2.7 trillion in “excess savings” during the pandemic, owing in part to $1.8 trillion of fiscal stimulus and a sharp pullback in spending during lockdowns. But over the past year, they spent 30% of that savings, Ellen Zentner, Morgan Stanley’s chief U.S. economist, explained in a Wednesday note.

Zenter said that consumers “tapped their savings” in order to continue their spending habits despite rising prices, noting that the household saving rate fell to a two-decade low of 3.2% in 2022 versus nearly 9% in 2019. On Thursday, she argued that higher interest rates will weigh on businesses and consumers this year, leading GDP growth to sink to just 0.2% in the first quarter.

Nationwide chief economist Kathy Bostjancic told Fortune that rising inventories also accounted for 1.5 percentage points of the overall 2.9% GDP growth last quarter. 

“The mix of GDP growth is not healthy and bodes poorly for economic growth in 2023,” she argued.

Rising inventories—which can include companies’ goods ready for sale, goods undergoing production, or goods acquired to be used during production—can be a sign that businesses are struggling to offload products, which can lead to cutbacks in production in the future and slowing economic growth.

And while the latest GDP report showed evidence of resilient consumer spending last year, there was also some weakness in a critical stat that’s sometimes called “core” GDP—real final sales to private domestic purchasers. The measure strips out government spending and net exports to reveal trends in underlying demand, and it rose at just a 0.2% annualized rate in the fourth quarter, compared with 1.1% in the previous quarter.

“This core measure of core economic activity has been cooling since a peak at 10.7% annualized in the second quarter of 2021,” Bill Adams, chief economist for Comerica Bank, told Fortune, arguing that it’s a sign the economy was “losing momentum in late 2022.”

Recent economic indicators—including ISM manufacturing surveys that show a slowdown in that sector and an inverted yield—signal a “strong likelihood of a recession,” he added. And Adams isn’t alone in his fears for the U.S. economy. A number of top economists, CEOs, and some 70% of Americans say a U.S. recession is inevitable.

“We still expect the U.S. economy to experience a mild recession in the first half of 2023, as still-high inflation and sharply rising interest rates erode household incomes,” Cailin Birch, global economist at the Economist Intelligence Unit, told Fortune.

A ‘soft landing’

But Birch believes that any downturn is likely to be “modest and relatively short-lived,” and some experts are even more bullish. Carol Schleif, chief investment officer with BMO Family Office, argues that the latest GDP figures are evidence that the Fed’s “soft landing”—where inflation is tamed without sparking a recession—is in the cards after all. 

“While the path is narrow, our base case is that the Federal Reserve should be able to engineer a soft landing,” she told Fortune. “Businesses and consumers are moderating their spending after the initial exuberant post-pandemic surge, and we expect this slowing of momentum to allow the economy to tick along solidly but on a slower and more sustainable path.”

David Russell, vice president of market intelligence at TradeStation Group, also counts himself in the bulls camp, saying that the GDP report is evidence that things are “returning to normal” after three years of “unprecedented economic turmoil.”

“Today’s numbers are a net positive because they show moderating prices inflation and a very healthy job market,” he said. “Goldilocks seems to be emerging from the ashes of COVID, whether the naysayers like it or not.”