New York (CNN) The US economy grew at an annual rate of 2.7% in the last three months of the year, the US Department of Commerce reported on Thursday. That is less than the previous estimate of 2.9% growth in the quarter.
The slower growth in gross domestic product, a broad measure of economic activity, could be a sign that the Federal Reserve’s series of sharp rate hikes is having more of an impact than previously thought.
Other recent economic data, including January’s very strong jobs report and a strong recovery in retail sales, suggest the Fed could do more to reduce inflation through higher interest rates designed to slow the economy.
The Fed’s most recent rate hike earlier this month was just a quarter of a percentage point, the smallest hike in benchmark interest rates in nearly a year.
While the slower pace of overall growth may seem like good news to those who think the Fed should remain sluggish with rate hikes going forward, the report also included bad news on inflation.
The index that measures the prices paid for personal expenses, known as the PCE price index, rose 3.7% in the quarter, which is higher than the 3.2% in the preliminary report. The so-called PCE deflator, another closely monitored inflation measure of consumer spending in the report, rose to 3.9% from 3.5% previously.
“The biggest news [in the GDP report] was on inflation, which is still much hotter than the Fed would like,” said PNC Chief Economist Gus Faucher. “The upward revisions to inflation in the fourth quarter support further short-term increases in Fed Funds rates. This in turn means a further drag on the economy through higher rates in the second half of 2023.”
PNC says the Fed’s significant rate hikes since early last year could lead to a recession later in 2023.
“However, the recession should be mild given the current strength of the labor market, strong consumer balance sheets and a well-balanced housing market,” said Faucher.
Faucher said the slightly lower value for total GDP compared to the initial estimate a month ago was due to downward revisions to consumer spending and exports.
Still, both the PCE price index and the deflator are lagging far behind the pace of price increases seen in previous quarters. The PCE price index peaked at 7.5% in the first quarter of last year, while the PCE deflator reached 9% in the second quarter. After the Fed went aggressive with rate hikes in that quarter, the fall in inflation shows that the Fed has some influence.
Jobs remain strong
Also Thursday: Initial applications for unemployment insurance fell to 192,000 for the week ending Feb. 18, according to data released by the Department of Labor.
That’s 3,000 less than last week’s upwardly revised total of 195,000.
Economists were counting on 200,000 initial jobless claims, according to consensus estimates on Refinitiv.
Ongoing claims, filed by people who have received unemployment benefits for more than a week, fell from 1.696 million the week before to 1.654 million in the week ending Feb. 11. Economists had expected 1.7 million.
Despite a large number of layoffs in some industries, such as technology, media and the mortgage sector, the US labor market remains robust, with nearly two available jobs per job seeker, as companies remain reluctant to let workers go.
“While reports of corporate layoffs are becoming more common, those layoffs are not yet appearing in unemployment insurance data,” Stuart Hoffman, the PNC’s senior economist, wrote Thursday. “Part of this may be timing: if the company offers severance pay, the claims aren’t counted until the severance pay expires. Yet the job market remains remarkably strong.”
However, layoffs remain low in the broader economy and job growth remains strong.
In January, the US economy added 517,000 jobs – employment growth far exceeding economists’ expectations for a slowdown – and the unemployment rate fell to 3.4%, a level not seen since May 1969.
The tight labor market will keep the Fed on track to raise rates at its March meeting, Nancy Vanden Houten, chief economist for Oxford Economics in the US, said in a statement.
“We expect jobless claims to rise as the economy slows and eventually enters a mild recession later this year,” she wrote. “But the increase may be moderate compared to previous recessions, as employers will be reluctant to lay off workers who were hard to find in the first place.”
The unemployment claims are one of the most real-time economic figures released by the government, while the GDP report, particularly this month’s revision and final estimate of growth in next month’s fourth quarter, is among the least up-to-date. are closely watched by economists and investors.
Correction: An earlier version of this story incorrectly reported the quarter the latest GDP report measured. It reported on the fourth quarter.
CNN’s Alicia Wallace contributed to this report
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