Here’s Why Experts Predict A Return To Negative Economic Growth—And Potential Recession—Despite Strong GDP

U.S. gross domestic product grew at an estimated annual rate of 2.9% in the fourth quarter—after 3.2% growth in the third quarter— more than the 2.6% economists expected, the Bureau of Economic Analysis reported Thursday.

Despite the overall strength, Glenmede Vice President of Investment Strategy Michael Reynolds says the report contains “telltale signs” that the Federal Reserve’s interest rate hikes, which tanked stocks and the housing market last year, are “beginning to cascade through the economy,” with business investments, for example, decelerating “meaningfully” in a likely reaction to the higher costs.

Though consumer spending still appears in “decent shape,” Reynolds notes household spending growth has “begun to lose momentum,” with spending up 2.1% last quarter versus 2.3% in the third quarter and 3.1% one year earlier.

The data was “better than expected at a headline level, but weaker under the hood,” says Kroll Institute chief economist Megan Greene, who points out growth was boosted by the biggest gain in inventories in a year, which aren’t a “sustainable driver for growth” because they’re highly susceptible to changes in prices.

In a Thursday email, Pantheon Macro chief economist Ian Shepherdson agreed, saying the inventory component will likely fall this quarter—putting the economy at a high risk of facing an outright drop in first-quarter GDP.

“Whether this eventually is declared a recession will depend on what happens to employment and incomes,” Shepherdson posits, noting they are both likely to “soften markedly,” with a recent surge in layoff announcements pointing “unambiguously” to much higher unemployment in the coming months.