U.S. GDP increased at a 2.6% pace in Q3, above expectations as growth resumes

According to a study released on Thursday by the Bureau of Economic Analysis, the third quarter saw the U.S. economy register its first period of positive growth for 2022, at least temporarily allaying worries of a recession.

GDP, the total value of all goods and services produced from July through September, rose at an annualized rate of 2.6% during that time. That exceeded the Dow Jones projection of 2.3%.

The National Bureau of Economic Research is often regarded as the judge of downturns and expansions, but that reading comes after consecutive negative quarters to start the year, matching the criteria of a recession as it is popularly understood.

The shrinking trade deficit, which analysts predicted and believe to be an isolated event that won't be repeated in subsequent quarters, was a major contributor to the rise.

Consumer expenditure, nonresidential fixed investment, and government spending all saw rises in GDP. The study showed a continuing trend in consumer expenditure toward services as opposed to products, with services spending up 2.8% and goods spending declining by 1.2%.

Gains were countered by falls in private inventories and residential fixed investment, according to the BEA.

Paul Ashworth, a chiefly North American economist at Capital Economics, noted that while the 2.6% comeback in the third quarter more than reversed the decrease in the first half of the year, "we don't anticipate this momentum to be sustained." "Exports will eventually decline, and domestic demand is being stifled by rising interest rates. In the first part of next year, we anticipate a minor recession to hit the economy.

Following the news, markets rose, with the Dow Jones Industrial Average rising more than 300 points in early Wall Street trade.

The study is released as officials engage in a fierce struggle to control inflation, which is currently at its highest point in more than 40 years. A variety of reasons have contributed to price increases, including the Covid epidemic and an extraordinary fiscal and monetary stimulus that is still permeating the financial system.

The BEA report painted an overall image of a declining economy, especially in the consumer and private investment sectors.

Personal consumption expenditures, a measure of consumer spending, rose at just a 1.4% rate in the quarter, down from 2% in Q2. After declining 14.1% in the second quarter, gross private domestic investment decreased by 8.5% this quarter, maintaining a pattern. A key indicator of homebuilding, residential investment, plunged 26.4% after plunging 17.8% in Q2, showing a significant slowdown in the real estate industry.

Positively, exports increased by 14.4%, increasing GDP, while imports decreased by 6.9%, decreasing GDP. In the absence of net exports of goods and services, the headline figure would have been 2.77 percentage points lower, or basically flat GDP.

The inflation front saw some encouraging developments.

The chain-weighted price index, a cost-of-living indicator that takes consumer activity into account, increased 4.1% for the quarter, far less than the 5.3% growth predicted by Dow Jones, mostly as a result of declining energy costs. In addition, the personal consumption expenditures price index, which the Federal Reserve uses as a major indicator of inflation, rose 4.2% less than the 7.3% it rose in the previous quarter. Core prices—those that do not include food and energy—rose 4.5%, about in line with predictions on Wall Street.

The Fed started a campaign of interest rate increases earlier this year in an effort to control inflation. The benchmark borrowing rate of the central bank has increased by three percentage points since March, reaching its highest level shortly before the worst of the financial crisis.

These price hikes are intended to slow the economy's money flow and control the labor market, where job openings outnumber available workers by almost two to one. This situation has pushed up wages and contributed to a wage-price spiral that economists worry will send the United States into recession.

"None of these facts would necessarily support our worries about a recession. The Fed's rate hikes and how businesses and consumers react to them are more important factors, according to Luke Tilley, the chief economist at Wilmington Trust.

The most promising aspect, he continued, is that consumer spending is still being supported by job growth, salary growth, and consumer spending itself. "What we would be most worried about would be a rapid reduction in employment by enterprises."

At its meeting next week, the Fed is expected to approve raising interest rates for a fourth time in a row by 0.75 percentage points. However, subsequent rate hikes may be slower as policymakers take time to evaluate how their actions would affect the economy.

According to Preston Caldwell, head of U.S. economics at Morningstar, "The Fed will continue to err on the side of overtightening, which is sensible given the need to limit the danger of inflation being entrenched at high levels." "The rate of tightening is going to decrease very considerably after December," said the economist.

When the BEA issues a report on Friday that includes personal consumption expenditure prices for September, policymakers will receive another, more recent look at inflation statistics. According to that indicator, core prices—those that do not include food and energy—should have increased 5.2% from a year ago and 0.5% on a monthly basis.

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