After a strong finish to 2022, the U.S. economy appears headed for a slowdown.
The economy showed surprising resilience at the end of last year, growing at a healthy clip despite the war in Ukraine and the lingering effects of the coronavirus pandemic.
Forecasters say that growth is likely to slow, however, and possibly even reverse in the months to come, as consumers and businesses continue to deal with rising prices, as well as the Federal Reserve's aggressive push to boost interest rates.
The Commerce Department said Thursday that the nation's gross domestic product — the broadest measure of economic activity — grew at an annual rate of 2.9% between October and December.
That was down slightly from the previous three months, when the economy grew at an annual rate of 3.2%, but a marked improvement from the first half of the year, when GDP shrank.
"The economy really outperformed here in the second half of the year," says Mark Zandi, chief economist at Moody's Analytics. "Despite all the headwinds and the higher [interest] rates and all the things that went wrong, the economy was still able to grow in 2022."
The economy ended last year 1% larger than it was in the final months of 2021.
Consumer spending — a major driver of the economy — continued to increase in the final months of 2022, though at a slower pace than during the late summer and fall. Many people have tapped into savings built up early in the pandemic or turned to credit cards to maintain their spending habits in the face of inflation. But as savings are whittled away, consumers are growing more cautious.
"Everyday stuff is just costing more," says Nikki Moore, a married mother of two in Apopka, Florida. "The four of us going to the movies — nothing super, not 3D — just the four of us for tickets and concessions, that's like $100, just for a movie night."
Moore and her husband splurged last month on a tenth-anniversary vacation in Canada. But she's already dialing back her travel plans for her sons' upcoming spring break.
"We'll probably just stay home, and I'll take them to the zoo or something," Moore says.
In Iowa, Dan Usher is also looking to cut costs, after unexpected expenses last year when both his dishwasher and water heater needed replacing.
"It's kind of something that caught up on me," Usher says. "I like to travel, so I'll be traveling less. I like to eat out maybe once or twice a week. So I'll probably limit that to once a week."
Usher works for a company that makes private-label cereal. With cereal prices up nearly 16% over the last year, more shoppers have been switching to private-label products from more expensive, national brands.
"In times of economic hardship, you see pretty significant booms in the business," Usher says. "So I'm kind of lucky in that regard."
Many business forecasters think the economy is likely to slide into a recession this year.
Zandi thinks the U.S. will manage to sidestep that, but he does expect slower growth.
"The Federal Reserve is going to make sure of that," Zandi says. "They're raising interest rates aggressively in an effort to slow growth so that inflation comes back closer to their target. They're going to get what they want, one way or the other."
Mortgage rates have declined in recent weeks, but they remain well above 6%, much higher than they were a year ago. That's weighing on both new home construction and the sale of existing homes.
"The housing sector is in a recession," says Doug Duncan, chief economist for the mortgage giant Fannie Mae. "It will be a difficult year."
Duncan expects home prices to decline about 10% on average from their peak last year, before a housing recovery begins, sometime in 2024.
The housing slump was a net drag on GDP in the final months of last year.
The jump in mortgage rates is also weighing on Moore's family finances.
She and her husband refinanced their house in 2021 while interest rates were low, and used some of the proceeds to pay down credit card debt. Since then, the balance on their credit cards has ballooned again,.
"We paid them off, but now we're still back at square one," Moore says. With today's higher interest rates, refinancing again is not an option, so she's looking for other ways to cut costs.
"Don't make it sound like it's a pity party or anything," Moore says, noting that many other families are worse off. "I'm just finding more clever ways to cut back on certain things."