January 2023 National Economic Outlook

Real GDP Grew Again at the End of 2022; Inflation Is Starting to Slow, But So Is Consumer Spending

Executive Summary

Real GDP increased 2.9% at an annual rate in the fourth quarter of 2022, following a 3.2% increase in the third quarter, but small declines in the first and second quarters of last year. Real GDP was up 1.0% in the fourth quarter from one year earlier, below the economy’s long-term potential of around 1.7%. Real consumer spending rose 2.1% annualized in the fourth quarter, adding 1.4 percentage points to growth; most of the increase came on spending on services. 

There was a modest increase in business fixed investment, although there was a big drop in spending on equipment. Investment in residential structures (homebuilding, repairs, renovations) fell for a seventh straight quarter as higher interest rates remained a drag, declining almost 27% at an annualized rate and subtracting a very large 1.3 percentage points from growth. Trade and inventories were positives for growth in the fourth quarter. The GDP release for the fourth quarter came after PNC prepared its January forecast.

Inflation-adjusted consumer spending fell 0.3% in December, the second straight decline after a 0.2% drop in November, revised from a small increase. Consumer spending rose in October and was up in the fourth quarter as a whole from the third quarter. Inflation-adjusted after-tax income rose 0.2% in December, the same pace as in November. 

Several drags are hitting consumer spending simultaneously, including slower wage growth, high inflation, rising interest rates, falling home sales and associated purchases, and a big drop in household wealth because of declining stock prices and home values. In addition, consumer spending is shifting from goods, which consumers have bought a lot of over the past couple of years, to services.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, rose 0.1% for the second straight month in December. The core PCE price index, excluding food and energy, rose 0.3% in December, up from 0.2% in November. On a year-ago basis overall inflation was 5.0% in December, down from 5.5% in November and a peak of 7.0% in June. 

Year-over-year core inflation was 4.4% in December, down from 4.7% in November and a peak of 5.4% in February. Inflation is slowing, but remains above the Federal Reserve’s 2% objective. Core inflation has been stronger than overall inflation in recent months; the Federal Reserve pays more attention to core inflation because it is less volatile from month to month. Some of the strength in core inflation is coming from housing, and that is reversing with house prices and rents falling. But the Fed is concerned that strong services inflation, driven by wage growth, could persist.

Our economics team is consistently analyzing and forecasting national, regional and global economic trends.

View All Reports »