US GDP accelerated to a 2.6% pace in the third quarter, better than expected as growth turns positive

The U.S. economy recorded its first period of positive growth for 2022 in the third quarter, at least temporarily easing recession fears, the Bureau of Economic Analysis reported Thursday.

GDP, a sum of all goods and services produced from July to September, rose at an annualized rate of 2.6% for the period, according to the preliminary estimate. This was above the Dow Jones forecast for 2.3%.

The reading follows back-to-back negative quarters to start the year, meeting a commonly accepted definition of a recession, though the National Bureau of Economic Research is generally considered the arbiter of downturns and expansions.

The growth is largely due to the reduction in the trade deficit, which economists were expecting and see as a one-time event that will not recur in the coming quarters.

GDP gains also came from increases in consumer spending, non-residential fixed investment and government spending. The report reflects a continued shift in spending on services rather than goods, with spending on the former rising 2.8% while spending on goods fell 1.2%.

Lower residential fixed investment and private inventories offset the gains, the BEA said.

“Overall, while the 2.6% rebound in the third quarter more than reversed the decline in the first half, we do not expect this strength to continue,” wrote Paul Ashworth, senior economist. Head of North America at Capital Economics. “Exports will soon fade and domestic demand is crushed under the weight of rising interest rates. We expect the economy to enter a mild recession in the first half of next year.”

Four experts break down strong third-quarter US GDP data

Markets were higher after the release, with the Dow Jones Industrial Average gaining more than 300 points in early trading on Wall Street.

In other economic news on Thursday, weekly jobless claims rose slightly to 217,000 but were still below the 220,000 estimate. Additionally, durable goods orders rose 0.4% in September from compared to the previous month, below expectations of 0.7%.

The report comes as policymakers wage a pitched battle against inflation, which is hovering around its highest levels in more than 40 years. The price spikes are driven by a number of factors, many of them related to the Covid pandemic, but also driven by unprecedented fiscal and monetary stimulus that continues to work its way through the financial system.

The underlying picture of the BEA report showed a slowdown in the economy in key areas, particularly consumption and private investment.

Consumer spending as measured by personal consumption expenditure grew at a pace of just 1.4% in the quarter, compared to 2% in the second quarter. Gross private domestic investment fell 8.5%, continuing a trend after falling 14.1% in the second quarter. Residential investment, a proxy for home construction, fell 26.4% after a 17.8% plunge in Q2, reflecting a sharp slowdown in the housing market.

On the positive side, exports, which add to GDP, rose 14.4% while imports, which subtracted, fell 6.9%. Net exports of goods and services added 2.77 percentage points to the overall total, meaning GDP would have been essentially flat otherwise.

There was some good news on the inflation front.

The chain-weighted price index, a measure of the cost of living that adjusts for consumer behavior, rose 4.1% for the quarter, well below the Dow Jones estimate for a gain of 5.3%, largely due to lower energy prices. Additionally, the personal consumption expenditure price index, a key measure of inflation for the Federal Reserve, rose 4.2%, down sharply from 7.3% in the prior quarter. Underlying prices, excluding food and energy, rose 4.5%, roughly in line with Wall Street expectations.

Earlier this year, the Fed launched a campaign of interest rate hikes aimed at controlling inflation. Since March, the central bank has raised its benchmark borrowing rate by 3 percentage points, bringing it to its highest level since just before the worst of the financial crisis.

These increases are aimed at slowing the flow of money into the economy and taming a labor market where openings outnumber available workers nearly twice, a situation that has driven up wages and contributed to a wage spiral. -prices that economists say will tip the United States into recession.

“Our concerns about going into recession wouldn’t necessarily come from that data. It comes more from the extent to which the Fed raises rates and what happens when businesses and consumers react to that,” Luke said. Tilley, chief economist at Wilmington Trust.

“The most encouraging thing is you still have consumer spending, you still have job growth and wage growth and that should help on the consumer spending side,” he added. “What would worry us the most would be a sharp decline in hiring by companies.”

The Fed is widely accepted to approve a fourth straight interest rate hike of 0.75 percentage points at its meeting next week, but could then slow the pace of increases thereafter as officials take time to assess the impact of the policy on economic conditions.

“The Fed will continue to err on the side of over-tightening, which is reasonable given the desire to mitigate the risk of inflation becoming entrenched at elevated levels,” said Preston Caldwell, head of U.S. economics for Morningstar. “After December, we’ll probably see the pace of the tightening slow down quite dramatically.”

Policymakers will get another, more current look at inflation data when the BEA releases a report on Friday that includes personal consumption expenditure prices for September. This measure should show that basic prices excluding food and energy have increased by 5.2% compared to a year ago and by 0.5% on a monthly basis.

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