The last of the major 2022 economic data is being reported in January, including the quarterly GDP report. It can be helpful to review how the year ended compared to how it started and evaluate the comparison set for the coming quarter. This can be used as a gauge for how first quarter data is likely to progress and what is required to maintain 2022 growth levels.
Many of the headlines surrounding the quarterly GDP report focus on the annualized quarter-over-quarter change. On that measure, fourth quarter growth was 2.9%, down from 3.2% in the third quarter. This was slightly above the estimate of 2.8% and on the surface does not appear to indicate signs of economic weakness. The underlying details highlight some potential areas of concern. Inventories contributed 1.42% of the 2.9% growth, which could be an issue if spending does not accelerate in the coming quarters (more on that below). Also, net trade contributed 0.56% of the 2.9% growth. Net trade is calculated as exports minus imports. In normal times, exports being higher than imports is a sign of a positive trade balance and that companies are selling more than they are buying. In the fourth quarter, exports and imports were both negative, but imports were more negative (and were also negative in the third quarter). This could be a sign of declining global demand, especially domestic demand.
Source: Macrobond.
We like to look at GDP growth on a year-over-year basis as this is a more helpful way to look at how the economy is trending on a like to like quarter and smooths out some of the volatility associated with annualizing quarterly numbers. On this measure, year-over-year GDP has declined from 5.7% at the end of 2021 to 1.0% at the end of 2022 (the rate of change in GDP growth slowed during 2022).
Source: Macrobond.
To stay at 1% year-over-year growth, first quarter 2023 GDP needs to increase by $199 billion compared to Q1 2022, which would be a $7 billion higher rate of change than the fourth quarter to fourth quarter just reported (Q4 2022 GDP increased by $192 billion compared to Q4 2021). That appears on the surface like a small amount but would be an improvement from the recent trends in 2022. The $192 billion increase from third quarter 2022 to third quarter 2021 was a deceleration from the $382 billion increase from second quarter to second quarter, and much less than the increase in fourth quarter 2021 and first quarter 2022.
Source: Macrobond.
The production side of the economy also slowed in the fourth quarter of 2022 and throughout the year.
Industrial production was negative on a month-over-month basis each month from October to December, and the index value declined -1.3% from September to December. The year-over-year growth rate in December of 2022 was 1.65%, down from 5.0% in September and 3.7% in December 2021. The comparison set for the coming quarter is also challenging, as the year-over-year growth from January to March 2021 was 2.9%, 6.9%, and 4.8%, respectively. This means that if industrial production stays flat in Q1 2023 (which would be an improvement from the Q4 trend), it will be negative y/y by March 2023.
Source: Macrobond.
Durable goods activity surprised to the upside to end the year with a 5.6% month-over-month increase and a year-over year-growth rate of 12%. This growth rate is somewhat misleading, as aircraft orders increased 115% month-over-month due to a large delivery order. This is unlikely to repeat in the coming months as this number is highly volatile, so it is helpful to look at goods measures on a few different measures.
Source: Macrobond.
Durable goods, excluding transportation, decreased -0.1% m/m in December and is up just 0.05% from September to December. The year-over-year growth rate has declined to 2.1%, down from 4.7% in September and 10% in December 2021. The comparison set in the first quarter is difficult as the year-over-year growth from January to March 2022 was 9.7%, 9.3%, and 9.0% respectively. If durable goods excluding transportation stays at the same level as December 2022, the year-over-year growth rate will decline to 0.45% by March 2023.
Source: Macrobond.
Durable goods orders nondefense, excluding aircraft and parts (often referred to as core capex), decreased -0.2% m/m in December, after being flat m/m in November, and increased just 0.08% from September to December. The year-over year-growth rate in December was 5.2%, down from 8.0% in September and 11.3% in December 2021. Core capex has a challenging comparison set to start 2023 as year-over-year growth from January to March 2022 was 11.5%, 11.6%, and 10.6% respectively. If core capex stays at the December 2022 level (which would be an improvement from recent monthly growth levels), the year-over-year growth rate will drop to 2.80% by March 2023.
Source: Macrobond.
The consumer side of the economy also decelerated in the fourth quarter and during 2022 as evidenced by spending data. Nominal personal consumption expenditures (PCE) declined -0.2% month-over-month in December (and were also negative in November) and increased 0.45% from September to December. The year-over-year growth rate ended 2022 at 7.4%, down from 8.5% in September and 13.4% in December 2021. The comparison set in the first quarter is steep, with year-over-year growth from January to March 2022 being 12.0%, 13.5%, and 9.2% respectively. If PCE stays at December levels (which would be an improvement from current growth rates), the year-over-year growth rate will decline to 3.85% in March 2023.
Source: Macrobond.
Inflation adjusted consumption (real PCE) has been even weaker in 2022 as consumer prices increased relative to 2021. Real PCE was also negative month-over-month in December and November and decreased -0.07% from September to December. The year growth rate ended 2022 at 2.2%, a slight improvement from 1.7% but a decline from 7.0% in December 2021. The comparison set at the start of 2023 is also challenging with year-over-year growth of 5.5% in January 2022 and 6.7% in February, before slowing to 2.2% in March. If real PCE stays at December levels (which would be an improvement from current growth rates), the year-over-year growth rate will decline to 1.10% in March 2023.
Source: Macrobond.
Retail sales data also slowed throughout 2022. December and November were both negative on a month-over-month basis, and sales declined -1.25% from September to December. The year-over-year growth rate declined to 6.0% from 7.80% in September and 17.5% in December 2021. The comparison set is very difficult to start 2023 with year-over-year growth in January and February 2022 both above 13%. If retail stays at the December level (an improvement from current growth rates), year-over-year growth will be 0.20% by March 2023.
Source: Macrobond.
Much of the weakness in spending can be attributed to slowing income growth. There are several ways to measure income, the broadest being nominal person income. This measurement increased 0.2% m/m in December, which was the smallest monthly increase since April 2022. The year-over-year growth rate declined to 4.6% from 4.9% in September and 7.2% in December. Unlike the other economic data, the comparison set for income measures is easier in 2023 because the end of fiscal benefits in 2021 caused income measures to decline year-over-year in 2022, and consumer price measures have slowed in the second half of 2022, which has caused real income measures to improve.
Source: Macrobond.
Real personal income increased 0.17% m/m in December, the second highest since July. The year-over-year growth rate was -0.35%, which is the highest since December 2021 (the last time the growth rate was positive).
Source: Macrobond.
Real personal income, excluding transfer payments, has improved recently (largest monthly increase since July), but the year growth rate ended at 0.25% compared to 1.85% in December 2021. This will be an important measure to watch in 2023 as it shows earned income only and has a difficult comparison set in the first quarter.
Source: Macrobond.
Disposable income measures income net of taxes. This shows what consumers actually take home and have to spend. Real disposable income is income after taxes and price increases. This measure of income increased 0.2% m/m in December, the smallest increase since September. The year-over-year growth rate in December was -1.8% y/y, up from -3.3% y/y in September but down from -0.3% in December 2021. The year-over-year growth rate has been negative since April 2021 (March 2021 was the last fiscal payment).
Source: Macrobond.
It is possible that income measures could improve in 2023 as the comparison set is easy and consumer price growth has slowed into the end of 2022. The recent increase in layoff announcements could indicate that labor market data may weaken in 2023, which could be a headwind to income growth. The wages and salaries component of personal income also slowed in the fourth quarter, +1.2% q/q in Q4 down from +1.7% in Q3, and compared to 2021, +8.4% in 2022 down from +8.8% in 2021. An increase in unemployment in 2023 would make it more difficult for total wages in aggregate to increase.
Source: Macrobond.
While spending and income data have slowed, so have savings. The personal savings rate increased to 3.4% in December (highest since May 2022) but is down from 7.5% in December 2021 and 8.3% in December 2019.
Source: Macrobond.
While savings have declined, credit card debt has been increasing at a record pace. Credit card growth in November 2022 was up 15% compared to November 2021. The dollar amount increase in credit card balances over the last twelve months is a record $154 billion. The average rolling 12 month increase since 2000 is $23 billion. This is concerning not only from a balance sheet standpoint but also a future spending standpoint. In 2022, savings rates declined by 5% and credit card debt increased by a record amount, and sales growth rates declined significantly. This level of credit card growth is unlikely to repeat in 2023, which means real incomes need to increase for spending measures to reaccelerate.
Source: Macrobond.
Many of the major components of the economy slowed in 2022, which contributed to a decline in savings rates and an increase in consumer debt. Since the first quarter of 2022 was the peak in economic growth for the year, the comparison for 2023 is most difficult in the coming months. All of this increases the likelihood that the current deceleration trend remains in place in first quarter of 2023.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
Senior Economic Analyst
Boyd Watterson Asset Management, LLC