The U.S. economy rebounded in the third quarter after shrinking 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 take effect.
Gross domestic product rose 2.6 percent on an annualized basis between July and September, according to the Commerce Department’s report released Thursday. That beat economists’ expectations and marked a sharp turnaround from the 0.6 percent decline in the second quarter of 2022 and the 1.6 percent 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 falling consumer demand dampened imports while overall exports rose, thanks in part to sales from the oil sector. War-related shortages in Ukraine have sparked unprecedented demand overseas for US petroleum products.
These trade trends masked a softening of domestic consumer demand that suggests the economy is losing strength. Consumer spending rose just 1.4 percent, according to the Commerce Department’s GDP report, which was higher than expected but much slower than the previous period.
The most important driver of underlying demand in the economy – final sales to domestic buyers, excluding government spending – rose just 0.1 percent. This is a decrease from 0.5 percent in the second quarter and 2.1 percent in the first quarter.
“This [GDP] the number is weaker in terms of the signal it sends about the forward-looking strength of the economy than the last one, even though the headline was positive, said Eric Winograd, director of advanced market economics research at AllianceBernstein.
U.S. stocks gave up some of their first early gains after the report, with the S&P 500 up 0.2 percent in late morning trade. 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 number as likely to push the Federal Reserve toward even tighter policy than expected.
The Fed is poised to deliver its fourth straight rate hike of 0.75 percentage points early next month, which will raise the key rate to a new target range of 3.75 percent to 4 percent. As recently as March, the federal funds rate held close to 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, not just given the amount they’ve already tightened but the fact that 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 percent, but other parts of the economy continue to show signs of strength, most notably the labor market.
Coupled with the nascent signs of consumer demand slowing in the latest GDP report, Winograd said, “That 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 impact is and minimize the risk of going too far,” he added.
Jonathan Pingle, chief US economist at UBS who previously worked at the Fed, noted that the central bank faced a “tough problem” if inflation continued to come in higher than expected.
“If they are still surprised by inflation, how confident can they be about the outlook?”
Pingle now expects the federal funds rate to peak around 5 percent next year, above officials’ forecasts in September.
Given the impact the Fed’s actions are expected to have on economic growth and the labor market, most economists now expect the unemployment rate to rise substantially from the current level of 3.5 percent and the economy to tip into a recession next year.
Top Biden administration officials argue 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 the odds have increased.
A debate raged over the summer about whether the US economy was already in recession, given that two consecutive quarters of shrinking GDP have long been considered the usual criteria for a “technical recession”. But at the time, top policymakers in the Biden administration and at the Federal Reserve pushed back on that framing, citing ample evidence that the economy was still on solid footing.
The official judges of a recession, a group of economists at the National Bureau of Economic Research, characterize one as a “significant decline in economic activity that is widespread throughout the economy and lasts more than a few months”. They typically look at a range of metrics, including monthly job growth, consumer spending on goods and services, and industrial production.
Additional reporting by Kate Duguid in New York
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