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Even though higher borrowing costs and rising costs of living slowed growth, the US economy did better than expected at the end of last year.
The US economy grew at an annual rate of 2.9% in the last three months of 2022, according to official numbers.
That was less than the 3.2% in the previous quarter because home sales and building fell.
Even though the job market has been stable, some analysts are worried that the US economy is heading for a recession.
The unemployment rate is close to a record low, but other parts of the US economy are getting worse.
Even though December is usually a big shopping month, retail sales dropped 1.1% from November to December.
Manufacturing has also been hurt, and the stock market fell sharply last year.
According to a report released on Thursday, housing investment, which is affected by interest rates, fell at an annual rate of almost 27% in the three months leading up to December. A drop in the building of new homes caused this.
But consumer spending, the main thing that keeps the US economy going, kept going at a steady, if slower, pace.
The economy grew by 2.1% for the whole year. Last year, after the pandemic, the economy roared back to life and grew by 5.9%, the fastest rate since 1984.
This rise caused prices to go up quickly, so the US central bank had to step in to keep prices stable.
The Federal Reserve raised interest rates last year from close to zero to more than 4%, which was the highest rate in 15 years.
By making it more costly to borrow, the bank hopes to get people to save more and spend less, which will help keep prices from going up too fast. But it could cause a big slowdown that would put millions of people out of work.
There have been more reports of job cuts. This week, big companies like 3M, Dow, IBM, and SAP announced that they would be laying off many people. But some, like the Chipotle restaurant chain, are hiring more people.
Fed officials have said they are still hopeful that the economy can adjust without losing many jobs. However, this would mean that their campaign to raise interest rates could end with a “soft landing.”
“The Federal Reserve has been working towards a “soft landing” for almost a year by raising short-term interest rates just enough to bring down inflation without causing a recession. Even though the Fed is trying to help the economy, it’s clear that the economy is still doing pretty well, which means they’re doing a good job “The managing director of Charles Schwab UK, Richard Flynn, said this.
“However, investors may worry that today’s numbers aren’t telling the whole story because other recent data points to a recession.”
Will a drop in US inflation show the rest of the world what to do?
The US helped make the cost of living go up all over the world. Now that the country’s price inflation seems to be slowing down, does this mean that the rest of the world should follow suit?
The US was the first major economy in the world where inflation took hold. This happened when the government gave out a lot of money to help people during a pandemic, which caused a lot of people to spend and do more things.
Soon, prices went up all over the world, as strong demand from American buyers drove up the price of oil and other necessities, global shipping companies raised their fees, and companies with shortages raised their prices.
Then, when the US central bank started raising interest rates to deal with the problem, it caused a rush of money into the country. This sent the dollar to its highest level in 20 years and caused prices to go up even more in other countries.
The US wasn’t the only cause of the sudden rise in living costs. The war in Ukraine also played a big role, especially in Europe, where it cut off food supplies and messed up energy markets.
Still, analysts say that if America’s inflation problem is getting better, that’s good news for the rest of the world, especially if it means the central bank can ease up on its fight and let exchange rates stabilize.
Effects of the dollar on the US economy
In 2022, the US central bank raised its key interest rate to its highest level in 15 years. Many other countries did the same thing.
By making it more expensive to borrow money, the bank was trying to stop things like business growth and spending on homes and cars, pushing up prices.
But last month, it said it would stop raising rates so quickly. This is because officials want to keep the economy from slowing down and are betting that most of their work is done.
Analysts say that the policy change should bring relief to the rest of the world, which has been dealing with the historical rise in the value of the dollar caused by the bank’s actions.
Even though the Fed has said it will slow down its rate hikes, it is still hard to know what will happen next.
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The bank thinks that inflation in the US will drop to about 3% by the end of 2023, but Prof. Dominguez says that this prediction “seems quite optimistic.”
For now, the US job market is still strong, and workers are pushing for higher wages, which could cause prices to go up in the future.
If the Fed has to be tougher than expected, it could affect exchange rates and the cost of borrowing in other countries because other central banks will feel pressured to do the same.