The Bureau of Economic Analysis (BEA) released its Advance Estimate for Q4 2022 real GDP last week, and the number came in a bit better than expected at +2.9%. Following the Q3 performance of +3.2%, the U.S. economy managed to shift course rather nicely from the technical recession during the first half of last year. For the record, according to the BEA, real GDP ended up rising +2.1% for 2022 as a whole.

While positive GDP numbers are good news, it’s not time to be doing cartwheels just yet. Arguably, one could ascertain that this data is a bit like looking in the rearview mirror. While we would agree with that assessment, the underlying components can offer some insights into what could be coming down the pike. From that perspective, it’s a mixed bag at best, but there are signs that suggest readings from the plus side of the ledger could become more challenging as 2023 moves along. Let’s take a look at the five main cylinders of the economic engine.

On the positive side of the ledger, personal consumption continues to provide support. The combination of job and wage growth is certainly playing a role here, but there have also been anecdotal reports of households dipping into their savings, as well as the remaining pieces of their COVID-19 stimulus checks. Nevertheless, consumer spending goes into the plus column, but outlays continue to shift to services rather than goods.

Gross private domestic investment is a bit more difficult and is showing signs of continued softening. Residential outlays have continued plunging, falling roughly -27% in each of the last two quarters. This is no doubt a direct reflection of the considerable slump in housing. A bit more troubling has been the slowing pace in the nonresidential, structures and equipment categories. For government expenditures, with COVID-19 relief falling off the books, this component could be a bit more volatile going forward but could still provide support due to the recent passage of large spending packages.

That brings us to the two “wild cards”: trade and inventories. Given the restrictive monetary policy stances on a global basis, it’s difficult to envision net exports providing much, if any, support to the bottom line. Even China’s reopening should not be overstated. U.S. exports to China pre-COVID-19 were measurable in absolute terms but well below other areas/countries. To provide some perspective, exports to the European Union were more than 3.7x greater, with our North American counterparts, Canada and Mexico, well surpassing China’s total as well. In fact, exports to the UK are not too far behind the China tally.

For inventories, it was a good news/bad news story in Q4. The good news was that inventories provided a net positive contribution of nearly +1.5%. The bad news is that it may have been the result of “unwanted” inventory positions: in other words, stocks accumulating on the shelves because there weren’t enough buyers. Looking ahead, it is difficult to envision an optimistic case for a “wanted” inventory buildup as the broader economy slows further or outright contracts.

Cutting through all of the noise within the GDP report, there is one component that speaks volumes: final sales to private domestic purchasers. This category captures underlying demand, in our opinion, as it eliminates both trade and inventories. In Q4, this component rose a scant +0.2%, compared to the aforementioned +2.9% increase for real GDP as a whole.

History shows that achieving a “soft landing” is an incredibly difficult task, not to mention when a certain central bank raises rates 425 basis points over a nine-month period. For the record, early projections for Q1 2023 real GDP are coming in barely above zero, with the Bloomberg consensus actually seeing negative readings for both Q2 and Q3—a technical recession if it comes to fruition.