U.S. GDP Beats Expectations

"This is likely to be the last strong quarter for a while, especially as the details are already not quite so encouraging" - Commerzbank.

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GBP/USD remained buoyant around the 1.24 level on Thursday after official figures painted the world's largest economy into a picture of rude health that could have implications for financial market pricing of the Federal Reserve (Fed) interest rate outlook. 

U.S. growth would have accelerated last quarter if not for an upward revision to the Bureau of Economic Analysis' estimate for third quarter growth, which was lifted from an annualised 2.6% to 3.2% and suggests the economy actually softened a touch during its 2.9% final quarter expansion.

Nonetheless, the final quarter figure was notably stronger than the 2.6% increase anticipated by consensus and few, if any economists had expected the third quarter number to be revised up so significantly.

"GDP growth of 2.9% in the final quarter of 2022 dramatically exceeded expectations, making economists’ forecasts of a 2023 recession appear increasingly improbable," says Hugh Grieves, fund manager for the Premier Miton US Opportunities Fund.

"The American consumer’s robust demand for services following Covid lockdowns continues apace, supported by unprecedented savings accumulated through the pandemic combined with an employment market that shows no signs of weakening in the face of continued interest rate rises," he adds.

Above: Pound to Dollar rate shown at hourly intervals alongside 02-year U.S. bond yield. Click image for closer inspection. 

Falling investment in residential real estate and declining export volumes weighed around the ankles of the economy but were more than offset by commercial inventory building, commercial real estate investment, consumer spending and government spending at federal, state and local levels. 

"While the headline figure represented a very modest deceleration from the 3.2% pace of growth seen in Q3, final domestic demand (which removes inventories and net trade) slowed more significantly," says Katherine Judge, an economist at CIBC Capital Markets. 

"With inventories now elevated across many industries, and consumers running through excess savings, we see the potential for a contraction in the economy in the first quarter as the impact of past rate hikes materializes more fully, and consistent with a tapering off of momentum," she adds. 

While the robust performance of the final quarter could yet give way to weakness in the opening months of the year, the Department of Labor data released on Thursday suggested ongoing resilience in the job market that is supportive of the outlook for consumer spending. 

The labour data suggested new claims for unemployment-related welfare assistance fell from 203k to 186k last week, their lowest since March 2022.  

Source: Commerzbank Research. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

"This is likely to be the last strong quarter for a while, especially as the details are already not quite so encouraging. We still expect the economy to slide into recession due to the Fed's massive rate hikes," warns Dr Christoph Balz, a senior economist at Commerzbank. 

"Some "hard" December data such as retail sales and industrial production were already very weak, which could be a sign that the economy is noticeably losing momentum. Survey-based indicators such as the ISM purchasing managers' indices are also pointing sharply downward," he adds.

The figures come amid a divergence of views between the markets and Federal Reserve (Fed) on the outlook for the economy and interest rates after markets bet with increasing confidence in recent weeks that borrowing costs are likely to be cut sharply before the year is out.

Thursday's data may have given the markets reason to pause for thought about the interest rate outlook but they haven't stopped analysts or economists from anticipating outright declines in GDP and a possible recession up ahead. 

"We think final demand growth will be minimal in the next couple quarters, with headline GDP falling. Whether this eventually is declared a recession will depend on what happens to employment and incomes, but they are both likely to soften markedly, at least," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics, in review of the data.

Above: Pound to Dollar rate shown at daily intervals alongside  EUR/USD. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.