Economy likely slowed but stayed solid to end the year

Traders and investors will get the first look at how the economy finished out the year on Thursday morning.

Despite painful inflation, high-interest rates and rising concern that a recession may be months away, the U.S. likely registered decent growth.

Economists surveyed by Refinitiv expect the Commerce Department to say the economy grew at a 2.6% annual rate from October through December. That’s down from a 3.2% pace in the third quarter on strong consumer spending and rising exports.

It will be the first of three estimates of fourth-quarter GDP growth.

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Despite a likely second straight quarter of expansion, the economy is widely expected to slow and then slide into a recession sometime in the coming months as increasingly high-interest rates, engineered by the Federal Reserve, take a toll. 

The Fed’s rate hikes have inflated borrowing costs for consumers and businesses, from mortgages to auto loans to corporate credit.

The housing market, which is especially vulnerable to higher loan rates, has been badly bruised: Sales of existing homes have dropped for 11 straight months.

And consumer spending, which fuels roughly 70% of the entire economy, is likely to soften in the months ahead, along with the still-robust job market. 

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The resilience of the labor market has been a major surprise, but as higher rates make borrowing and spending increasingly expensive across the economy, many consumers will spend less and employers will likely hire less.

A smaller interest rate increase is expected next week.

The economy is likely beginning the year on firmer footing than at the start of 2022. Last year, the economy shrank at an annual pace of 1.6% from January through March and a further 0.6% from April through June.

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But the economy regained strength over the summer, propelled by resilient consumer spending and higher exports. It expanded at an unexpectedly strong 3.2% annual pace from July through September.

The Associated Press contributed to this report.