No, We're Not in a Recession: U.S. Economy Grew 2.9% in Q4

What happened

The U.S. gross domestic product (GDP) increased at an annual rate of 2.9% in the fourth quarter of 2022, according to an advance estimate by the Bureau of Economic Analysis (BEA). That slightly exceeded economist expectations of 2.8%.

While GDP decreased by 1.6% and 0.6% over the first two quarters of 2022, it rebounded in the second half of the year. GDP increased in the third quarter by 3.2%. Overall, GDP increased 2.1% in 2022, compared to 5.9% in 2021.

So what

GDP measures the total value of a country or region's economic output. It's one of the most accurate indicators of an area's economic strength. In the United States, an annual GDP growth rate of 2% to 3% is considered healthy for the economy.

The fourth quarter numbers are welcome news for consumers, especially after months of warnings that the United States is headed for a recession. A recession is a period of economic decline, with one commonly held definition stating that a recession is when the GDP declines for two consecutive quarters or more. While the latest data shows we're not in a recession, there are still some causes for concern when digging deeper.

"The 2.9% annualised rise in fourth-quarter GDP was a little stronger than we had expected, but the mix of growth was discouraging, and the monthly data suggest the economy lost momentum as the fourth quarter went on," wrote Andrew Hunter, Senior U.S. Economist for Capital Economics, in a response to the data. He still expects a mild recession in the first half of 2023.

Now what

Despite the gloomy outlook of some economists, there's no need to panic about a recession, at least not yet. Economic growth was in a healthy range both last quarter and over 2022 as a whole.

However, it's always wise to prepare your finances in case things take a turn for the worse. That way, you'll be ready if an economic downturn does happen. It's also easier not to panic about a potential recession when you know you're prepared financially.

The best thing you can do right now is make sure you have a sufficient emergency fund. A common recommendation is to have enough in your emergency savings to cover three to six months of living expenses. Some experts are even recommending a 12-month emergency fund. This is up to you, but a six-month emergency fund is a good initial goal.

To build your emergency fund, set up a savings account specifically for emergency savings. Figure out how much you can afford to contribute to it per month, and then set up automatic transfers for that amount. It takes time, but you'll make progress every month. The more that your emergency fund grows, the more financial security you'll have if a recession does happen.