The US economy grew less in fourth quarter than previously believed

By Chris Isidore and Alicia Wallace, CNN

The US economy grew at a 2.7% annual rate in the final three months of the year, the Commerce Department reported Thursday. That’s less than the previous estimate of 2.9% growth in the quarter.

The slower increase in gross domestic product, a broad measure of economic activity, could be a sign that the Federal Reserve’s series of steep interest rate hikes are having more of an impact than previously thought.

Other recent economic readings, including the very strong January jobs report and a strong rebound in retail sales, suggest the Fed could do more to try to beat back inflation through higher interest rates meant to slow the economy.

The Fed’s most recent rate hike earlier this month was only a quarter of a percentage point, the smallest increase in its benchmark rate in nearly a year.

While the slower pace of overall growth might seem like good news for those who think the Fed should continue to go slow on future rate hikes, the report also had some bad news on the inflation front.

The index that measures prices paid for personal spending, known as the PCE Price Index, rose 3.7% in the quarter, which is up from the 3.2% reading in the preliminary report. The so-called PCE deflator, another closely watched inflation measure of consumer spending in the report, was up to 3.9% from 3.5% previously.

“The biggest news [in the GDP report] was on inflation, which continues to run much hotter than the Fed would like,” said PNC Chief Economist Gus Faucher. “The upward revisions to fourth quarter inflation support further increases in the fed funds rate in the near term. This, in turn, means further drag on the economy from higher rates in the second half of 2023.”

PNC says the Fed’s significant increases in interest rates since earlier last year could lead to a recession later in 2023.

“The recession should be mild, however, 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 reading for overall GDP compared to the initial estimate of a month ago was due to downward revisions to consumer spending and exports.

Still, both the PCE Price Index and the deflator are well off previous quarters’ pace of price increases. The PCE Price Index hit a high of 7.5% in the first quarter of last year, while the PCE deflator hit 9% in the second quarter. After the Fed got aggressive with interest rate hikes in that quarter, the drop in inflation readings shows the Fed is having some impact.

Jobs remain strong

Also Thursday: First-time claims for unemployment insurance ticked down to 192,000 for the week ended February 18, according to data released by the Department of Labor.

That’s down 3,000 from the prior week’s upwardly revised total of 195,000.

Economists were expecting 200,000 initial unemployment applications, according to consensus estimates on Refinitiv.

Continuing claims, which are filed by people who have received unemployment benefits for more than one week, dropped to 1.654 million for the week ended February 11, from 1.696 million the week before. Economists were expecting 1.7 million.

Despite a slew of layoffs in some sectors like tech, media and the mortgage industry, the US labor market remains robust, with almost two jobs available per job seeker as companies remain reluctant to let go of workers.

“Although company layoff reports are becoming more common, those layoffs are not yet showing up in the unemployment insurance data,” Stuart Hoffman, PNC senior economist, wrote Thursday. “Some of this may be timing: If the company offers severance, the claims are not counted until the severance expires. But even so, the job market remains remarkably strong.”

However, layoffs remain low across the broader economy and job growth remains strong.

In January, the US economy added 517,000 jobs — employment growth that far exceeded economists’ expectations for a slowdown — and the unemployment rate fell to 3.4%, which is a level not seen since May 1969.

The tight labor market will keep the Fed on the path of raising rates at its March meeting, Nancy Vanden Houten, lead US economist for Oxford Economics said in a statement.

“We expect jobless claims to trend higher as the economy slows in response and eventually enters a mild recession later this year,” she wrote. “But the rise may be muted compared to prior recessions as employers will be reluctant to lay off workers that have been difficult to find in the first place.”

The jobless claims is one of the most real-time economic readings released by the government, while the GDP report, especially this month’s revision and next month’s final estimate of fourth quarter growth, are among the least current readings watched closely 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.

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CNN’s Alicia Wallace contributed to this report