US GDP rebounds 2.6% in the third quarter

The US economy rebounded in the third quarter after contracting for the first six months of this year, as a narrowing trade deficit concealed weakening consumer demand.

Gross domestic product increased by 2.6 per cent on an annualized basis between July and September, surpassing economists’ expectations and marking a sharp reversal from the 0.6 per cent drop in the second quarter of 2022 and the 1.6 per cent decline registered in the first three months of the year.

The expansion in the third quarter was propelled by a narrowing of the trade deficit, as ebbing consumer demand damped imports while exports rose. That comes despite a widening of the deficit for goods in September as the strong US dollar weighed on exports. Consumer spending advanced just 1.4 per cent, far slower than the previous period, in a sign that the economy is beginning to slow.

The data, released by the Department of Commerce on Thursday, effectively ends a debate that raged over the summer as to whether the US economy was already in a recession, but it did little to dispel fears that it will eventually tip into one given the aggressive steps the US central bank is taking to stamp out elevated inflation.

Two consecutive quarters of shrinking GDP has long been considered a common criteria for a so-called “technical recession”. However, top policymakers in the Biden administration and at the Federal Reserve pushed back forcefully on that framing, citing ample evidence that the economy was still on firm footing.

The official arbiters of a recession, a group of economists at the National Bureau of Economic Research, characterized 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 wide range of metrics including monthly jobs growth, consumer spending on goods and services, and industrial production.

The Fed is poised early next month to deliver its fourth consecutive 0.75 percentage point interest rate increase, which will lift its benchmark policy rate to a new target range of 3.75 per cent to 4 per cent. As recently as March, the federal funds rate hovered near zero, making this tightening campaign one of the most aggressive in the US central bank’s history.

While the Fed may soon consider slowing the pace of its rate rises, potentially as soon as December, it is not expected to pivot altogether away from tight monetary policy.

As of last month, most officials thought the fed funds rate would peak at 4.6 per cent, but now investors expect it to close in on 5 per cent next year.

Given how large an impact the Fed’s actions are expected to have on growth and the labor market, most economists now expect the unemployment rate to rise materially from its current level of 3.5 per cent and for the economy to tip into a recession next year.

Top officials in the Biden administration maintain that the US economy is strong enough to avoid that outcome, citing the resilience of the labor market, but even Jay Powell, the Fed chair, has acknowledged the odds have risen.

“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.

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