Jill On Money: Will US economic growth fall off a ledge?

Two recently released economic reports paint a nuanced picture of the U.S. economy.

The government said that U.S. gross domestic product (GDP) increased at a 2.9% annualized pace in the fourth quarter of 2022, capping a year when growth was up by just 1% (as measured from the fourth quarter a year earlier), down substantially from the 5.7% blazing hot 2021, though up from the horrendous 2020 when the economy shrank by 3.4%.

The pandemic really did wallop the economy. The U.S. does not usually see big swings up or down in successive years. In fact, in the five years leading up to COVID-19, here is how the economy, as measured by GDP, performed:

2015: +1.9%

2016: +2.0%

2017: +2.8%

2018: +2.3%

2019: +2.6%

Even though the economy eked out a gain last year, there are signs that trouble could be brewing.

Paul Ashworth of Capital Economics noted that “despite the apparent resilience of fourth-quarter GDP growth, the economy was on the precipice of a recession, and may already have fallen off the ledge,” mostly due to a pull-back in spending by consumers and businesses.

Off a ledge?

That language may lead you to think that the Federal Reserve would halt its rate hike campaign. But that is not what happened. While the central bank reduced the amount of the increase from a half of a percentage point to a quarter of a percentage point, it still hiked. The new range is 4.50 – 4.75%, the highest level since October 2007 when the Fed had just started cutting rates from a then-peak of 5.25%.

The reason behind the increase is that although inflation readings are improving, prices remain high, especially on the service side of the economy, which represents about 70% of the economy (vs. 30% for goods). In fact, there is a special inflation reading from the Federal Reserve Bank of Atlanta called “the sticky price index,” which tracks the components of the consumer price index (CPI) that are “sticky” or slow to change.

The Fed keeps a close eye on the sticky-price index, which as of December, was up 5.6% (on an annualized basis), following a 5.5% increase in November. On a core basis (excluding food and energy), the sticky-price index increased 5.7% (annualized) in December, and its 12-month percent change was 6.6%.

Those sticky numbers are still too high for the Fed, which is why they raised short-term interest rates. Although economists are worried that the Fed’s effort to tackle inflation could cause the economy to slow and even enter a recession, one group of Americans is very happy: savers.

As of December, the personal saving rate (the percentage of people’s incomes left after they pay taxes and spend money) stood at 3.4%. That is down significantly from the COVID apex of 33.8% (April 2020), but it is an improvement from the recent low level of 2.4% last September.

As Americans starting to sock away cash, just in case, they are enjoying much higher rates. According to bank account comparison site DepositAccounts.com, as of the end of January, the average 1-year Online CD Index stood at 4.37% and for those who want to lock-in for a longer period, the 5-year Online CD Index was yielding 4.04%.

Additionally, there are a bunch of online savings and money market accounts that are yielding more than 4%, though “unlike the small online banks, the major online banks haven’t come close.”

Bottom line for those fearful of growth falling off a ledge: an ample safety net can provide a lot of protection.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.