The US economy logged better than expected growth in the final quarter of 2022, even as the Federal Reserve’s aggressive campaign to raise borrowing costs began to weigh more heavily on business activity.

The world’s largest economy expanded 2.9 per cent on an annualised basis between September and December, according to data published by the commerce department on Thursday, slightly higher than economists’ forecasts of a 2.6 per cent increase. That marked a slowdown from 3.2 per cent growth in the third quarter, reflecting the steps the US central bank has taken so far to damp demand.

Since March, the Fed has raised its policy rate by more than 4 percentage points, repeatedly moving in 0.75 percentage point increments in a bid to catch up to inflation that proved far more intense than expected.

The Fed is now preparing to deliver a quarter-point rate rise, from the current range of 4.25 per cent to 4.5 per cent, at its meeting next week as it determines how much more to unleash on the economy now inflation appears to have peaked. Officials broadly back the federal funds rate hitting 5 per cent, and for that level to be maintained at least to the end of the year, suggesting further rate rises to come beyond the February decision.

The GDP data are the latest sign that the economy has proved more resilient than expected in the face of substantially higher borrowing costs, while also showing that the Fed’s actions are beginning to have a more notable effect.

“Looking at the headline [figure], it’s all looking good. But, looking under the hood, it’s just those troubling signs and a loss of momentum that we’ve been seeing really in broad swaths of the data,” said James Knightley, chief international economist at ING.

The fourth-quarter increase was fuelled in part by businesses amassing inventories, especially across the manufacturing and utilities sectors. Consumer spending, one of the main drivers of the US economy, was also steady, increasing 2.1 per cent.

However, the most important proxy for underlying demand in the economy — final sales to domestic purchasers, excluding government spending — rose just 0.2 per cent, down from 1.1 per cent in the third quarter.

In a further sign of weakness, fixed investment sank 6.7 per cent, with housing-related investment contracting 26.7 per cent on an annualised basis. Business investment rose just 0.7 per cent.

Over the year, GDP rose 1 per cent, down from the 5.7 per cent increase in 2021.

As the Fed ploughed ahead with its aggressive rate increases, companies across the manufacturing and services sectors have responded by trying to cut costs, pulling back on new hiring plans and slashing hours for workers. Mass lay-offs have also swept through the technology sector.

While the overall labour market still remains robust, with the unemployment rate hovering at a multi-decade low of 3.5 per cent and jobless claims last week falling to a multi-month low, there are budding concerns about the outlook for the economy.

Many economists expect the US to tip into a recession later this year as the unemployment rate closes in on 5 per cent.

“I’m worried that we are going to see negative GDP growth in the first quarter [of this year]. I think it’s going to be even worse in the second quarter,” Knightley said. “The Fed is still hiking, and in that environment, where are the positives going to come from? We could see a third consecutive [quarter] of negative growth.”

Gregory Daco at EY-Parthenon, said he expected the downturn to be “mild”, with GDP contracting 0.8 per cent at the worst of the slowdown. For 2023 overall, he forecast growth of 0.3 per cent.

But no Fed official has yet forecast a recession, maintaining instead that a “soft landing” can still be achieved.

The official arbiters of a recession, a group of economists at the National Bureau of Economic Research, characterise one as a “significant decline in economic activity that is spread across the economy and lasts more than a few months”. They typically look at a range of metrics including monthly jobs growth, consumer spending on goods and services, and industrial production.

A debate kicked off last year on whether the US economy was already in a recession, after registering two consecutive quarters of shrinking GDP in the first half of 2022. That has long been considered the common criteria for a “technical recession”. However at the time, top policymakers in the Biden administration and at the Fed said there was overwhelming evidence the US economy was strong.

Markets mostly took the GDP data in their stride. The S&P 500 was up 0.1 per cent in morning New York trading on Thursday, while US Treasuries remained slightly weaker.

Additional reporting by Kate Duguid in New York