The U.S. economy rebounded in the third quarter after contracting in the first six months of this year, despite mounting evidence that consumer spending is weakening as the Federal Reserve’s efforts to curb demand begin to to have effect
Gross domestic product rose an annualized 2.6 percent between July and September, according to the Commerce Department report released Thursday. That beat economists’ expectations and marked a strong reversal from the 0.6% decline in the second quarter of 2022 and the 1.6% decline recorded in the first three months of the year.
The expansion in the third quarter was driven by a narrowing of the trade deficit, as reduced consumer demand held back imports while exports as a whole rose, thanks in part to sales in the oil sector. Ukraine’s war-related shortages have led to unprecedented overseas demand for US oil products.
However, these trade trends hid a softening in domestic consumer demand that suggests the economy is losing steam. Consumer spending advanced just 1.4%, according to the Commerce Department’s GDP report, which was better than expected but much slower than the previous period.
The economy’s most important gauge of underlying demand — final sales to domestic buyers, excluding government spending — rose just 0.1 percent. This is down 0.5% from the second quarter and 2.1% from the first.
“This [GDP] The number is weaker in terms of the signal it sends about the strength of the economy going forward than the last one, even though the headline was positive,” said Eric Winograd, director of developed market economic research at AllianceBernstein .
US stocks rose after the report, with the S&P 500 up 0.7% in the morning. The two-year Treasury yield, which moves with interest rate expectations, fell to its lowest level in two weeks, suggesting investors did not see the figure as likely to push the Federal Reserve toward a policy even more restrictive than expected.
The Fed is poised early next month to deliver its fourth consecutive interest rate hike of 0.75 percentage points, which will lift its benchmark interest rate to a new target range of 3.75% at 4% As recently as March, the federal funds rate hovered near zero, making this tightening campaign one of the most aggressive in the history of the US central bank.
Officials are beginning to consider when to slow the pace of their rate hikes, given not only how much tightening they’ve already done, but the fact that their policy adjustments take time to filter through the economy
Interest rate-sensitive sectors such as housing have already weakened as mortgage rates have soared above 7%, but other pockets of the economy continue to show signs of strength, notably the labor market
Combined with nascent signs that consumer demand is softening in the latest GDP report, Winograd said, “It should give the Fed confidence that what they’re doing will have an effect.”
“It should also give them reason to slow down what they’re doing so they can see what the effect is and minimize the risk of going too far,” he added.
As of last month, most officials thought the fed funds rate would peak at 4.6 percent, but investors now expect it to close at 5 percent next year.
Given the impact the Fed’s actions are expected to have on economic growth and the labor market, most economists expect the unemployment rate to rise substantially from its current level of 3.5% and that the economy will fall into recession next year.
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Senior officials in the Biden administration maintain that the U.S. economy is strong enough to avoid that outcome, citing the resilience of the labor market, but even Jay Powell, the Fed chairman, has acknowledged that the odds have increased
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” he said at his last press conference in September.
Over the summer there was debate over whether the US economy was already in recession, given that two consecutive quarters of GDP contraction have long been considered a common criterion for a “technical recession”. At the time, however, top policymakers in the Biden administration and the Federal Reserve pushed back on that framework, citing ample evidence that the economy was still on solid footing.
The official arbiters of a recession, a group of economists at the National Bureau of Economic Research, characterize it as a “significant decrease in economic activity that extends throughout the economy and lasts more than a months”. They typically look at a number of metrics, including monthly employment growth, consumer spending on goods and services, and industrial production.
Additional reporting by Kate Duguid in New York