Economic Watch: Q4 GDP Report Shows More Evidence of Fed Monetary Tightening Effects

Executive Summary

• U.S. GDP increased by 2.9% annualized in Q4 2022, just ahead of consensus expectations of 2.8%. Inventories, government expenditures and spending on services were the main growth drivers.
• Although the headline GDP number was strong, weak residential investment and slowing consumption are cautionary signs.
• We expect the Fed’s tight monetary policy to continue with 25-bp rate increases at its next two meetings. After that, the fed funds rate should remain in a range of 4.75% to 5.0% for the rest of 2023.
• CBRE expects economic growth will slow in 2023, reflecting higher interest rates and tight credit conditions. A moderate recession is likely with full year GDP declining 0.6%.
• Amid a slowing economy, capital markets activity is expected to remain subdued in the first half of 2023, before beginning to recover later in the year. We expect leasing activity will also be tepid for most of the year.

Q4 2022 GDP

U.S. GDP increased by 2.9% on an annualized basis, slightly exceeding consensus expectations of 2.8%. While today’s headline number looks quite healthy, weakness in consumption is beginning to emerge. One measure of private consumption (final sales to private domestic purchasers) was up by just 0.2%, down from 1.1% in the third quarter. Business investment also slowed and residential investment, which is particularly interest-rate sensitive, fell by 26.7% in Q4. The quarter’s growth drivers, such as inventories and trade, are volatile and do not indicate underlying strength. Overall, the economy remains resilient, but increasingly reflects the effects of tighter monetary policy.

CBRE Forecast

We expect the U.S. economy will enter a moderate, not a severe, recession in 2023. This will impact employment levels with the jobless rate reaching 4.6% by year-end, up from 3.5% today. CBRE expects CPI to fall to 4.0% by year-end and Core PCE, the Fed’s preferred inflation measure, to end the year at 3.4%. These conditions will allow the Fed to pause its rate increases later in 2023, following two more 25-bp -rate hikes in coming months.

Economic weakness means that real estate fundamentals likely will soften. However, an expected drop in the 10-year Treasury yield to 3.2% by year-end will aid the recovery of real estate investment volumes later this year.

Figure 1: CBRE House View