U.S. GDP Rebounds in Third Quarter

Lucia Mutikani |

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The U.S. economy rebounded strongly in the third quarter amid a shrinking trade deficit, but the data overstated the nation's economic health as domestic demand was the weakest in two years because of the Federal Reserve's aggressive interest rate hikes. The Commerce Department's advance third-quarter gross domestic product report showed residential investment contracting for a sixth straight quarter, the longest such stretch since the housing market collapse in 2006, as the sector buckles under the weight of soaring mortgage rates. While overall inflation slowed substantially from the second quarter, underlying price pressures continued to bubble. Still, the return to growth after two straight quarterly declines in GDP offered evidence that the economy was not in a recession, though the risks of a downturn have increased as the Fed doubles down on rate hikes to battle the fastest-rising inflation in 40 years. Despite the shiny headline number, a look under the hood shows a much grimmer picture of the U.S. economy, one that is clearly losing steam. With the full effect of past and future Fed rate hikes still to be felt, the economy appears poised for a downturn in the first half of next year. Gross domestic product increased at a 2.6% annualized rate last quarter after contracting at a 0.6% pace in the second quarter. Economists polled by Reuters had forecast GDP growth would rebound at a 2.4% rate, with estimates ranging from as low as a 0.8% rate to as high as a 3.7% pace. The trade deficit narrowed sharply as slowing demand curbed the goods import bill. Exports also increased during the quarter. The smaller trade gap added 2.77 percentage points to GDP growth, the most since the third quarter of 1980. Final sales to private domestic purchasers, which exclude trade, inventories and government spending, edged up at only a 0.1% rate, a sign that higher borrowing cost were starting to erode demand. That was the slowest rise in this measure of domestic demand since the second quarter of 2020 and followed a 0.5% rate of increase in the second quarter. GDP growth cannot be sustained without domestic private-sector growth. The data will probably have little impact on monetary policy, though Fed officials could draw some comfort from the ebbing demand. The Fed has raised its benchmark overnight interest rate from near zero in March to the current range of 3.00% to 3.25%, the swiftest pace of policy tightening in a generation or more. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.4% rate from the April-June period's 2.0% pace. Initial claims for unemployment benefits increased 3,000 to a seasonally adjusted 217,000 for the week ended Oct. 22. Claims have remained significantly low despite reports of layoffs at companies, mostly in sectors sensitive to interest rates. "Even as the economy slows, employers appear to be reluctant to lay off workers that they have struggled to hire and retain," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York. "We don't look for claims to fall much below current levels, but we don't look for a significant rise in claims or unemployment either until we enter a recession." Inflation remains uncomfortably high. The personal consumption expenditures price index excluding the volatile food and energy components rose at a 4.5% rate after increasing at a 4.7% rate in the prior quarter.