The U.S. economy grew slowly over the summer, raising fears of a looming recession, but also holding out hope that a recession could be avoided.
Inflation-adjusted gross domestic product returned to growth in the third quarter after two consecutive quarters of contraction, according to government data released Thursday. has slowed, and a sharp rise in interest rates has led to the steepest contraction of the housing sector since the first months of the pandemic.
The report highlights the delicate balance the Federal Reserve faces in trying to contain the fastest inflation in 40 years. Policymakers have been raising interest rates aggressively in recent months and are expected to do so again at next week’s meeting.
Third-quarter data (GDP increased by 0.6%, with annual growth of 2.6%, according to the Department of Commerce) suggests that the road to such a “soft landing” remains open but narrow. doing.
“It’s good that the economy hasn’t collapsed,” said Carola Friedman, an economist at Northwestern University. “As long as consumption and investment manage to manage below-trend growth rather than a complete collapse, that would be the ideal scenario.”
What is inflation? Inflation is Loss of purchasing power over time, that is, your dollar won’t go the same way tomorrow as it does today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
President Biden welcomed the report in a statement Thursday morning. “But today we have more evidence that the economic recovery continues to move forward.”
By one popular definition, the US economy entered a recession early in the year when GDP contracted for two straight quarters. Officially, however, recessions are being determined by a group of researchers at the National Bureau of Economic Research, who look at broader indicators such as employment, income and spending.
Most analysts don’t think the economy has lived up to its more formal definition, with third-quarter numbers slightly better than forecasters expected, but a recession yet to begin. provided further evidence.
However, the overall GDP figures were distorted by factors of international trade that often showed large fluctuations from one period to the next. Economists tend to focus on less volatile factors that show the recovery is steadily losing momentum as the year progresses. His one closely monitored metric suggests that private sector demand almost completely stalled in the third quarter.
“Ignore the headline numbers. Growth is slowing,” said Michael Gappen, chief U.S. economist at Bank of America. I don’t think so.”
Consumer spending, the cornerstone of the US economy, increased 0.4% in the third quarter, down from 0.5% growth in the previous quarter. Spending on goods fell for his third consecutive quarter, while spending on services slowed but remained positive.
Consumer spending continues to rise despite rising interest rates and rising prices. That’s because consumers are pulling out their savings to continue spending on vacations, restaurant meals, and other in-person activities that many missed early in the pandemic. But how long it will last is unknown. The American saved his 3.3% of after-tax income in the third quarter. This is his lowest percentage since 2007.
“‘Borrowed time’ is how we describe today’s consumer,” said Tim Quinlan, senior economist at Wells Fargo. It’s rising fast.”
Understanding Inflation and How It Affects You
Inflation slowed in the third quarter as oil prices fell. This led to an increase in inflation-adjusted personal income after a decline in the second quarter. Since then, however, oil prices have recovered somewhat, and prices for food, rent, and other essentials have continued to rise.
The impact of higher interest rates is evident in the housing market, where both home construction and sales have slowed sharply in recent months. The housing sector shrank by 7.4% in the third quarter, deducting 1.4 percentage points from the overall GDP annual growth. Businesses also cut investments in commercial and industrial buildings, and another data released on Thursday showed a key indicator of business investment fell in his September.
A slowdown in housing could lead to further cuts in consumer spending as homeowners feel poorer and fewer need to buy homes and fill them with furniture and appliances. Mortgage interest rate hits 7% Thursday, the highest level since 2002.
“Housing is the single biggest trigger for additional spending and it is no longer there,” said Diane Swonk, chief economist at accounting firm KPMG. It’s a turnaround, and when things start going too fast, you start wondering what the knock-on effect is and what the spillover effect is.”
In a way, the third quarter first quarter, GDP shrank, but private consumption was strong. In both cases the fluctuations were caused by international trade. Imports, which don’t count against domestic production figures, surged earlier this year as a strong economic recovery prompted Americans to buy more goods from abroad. Exports fell as the rest of the world recovered more slowly from the pandemic.
Both trends are starting to reverse as American consumers move away from imports and spend more on services, and foreign demand for American-made goods recovers. The data varies greatly from time to time.
Few economists expect the strong third quarter trade data to continue. In particular, the strong dollar makes American products less attractive abroad.
Jim Tankersley contributed to the report.