The U.S. economy picked up in the third quarter on rising trade, but demand remained stagnant
- GDP grew by 2.6% in the third quarter
- Trade is the main part of the growth recovery
- Consumer spending is slowing; funds are still lagging behind
- Weekly jobless claims rise by 3,000 to 217,000
WASHINGTON, Oct 27 (Reuters) – The U.S. economy rebounded strongly in the third quarter amid a narrowed trade deficit, but data overstated the country’s economic health as domestic demand was the weakest in two years amid aggressive interest rate hikes by the Federal Reserve.
The Commerce Department’s preliminary third-quarter gross domestic product report on Thursday showed housing investment contracted in the sixth quarter, the longest stretch since the housing market collapsed in 2006, as the sector grappled with rising mortgage rates.
Although headline inflation has moderated significantly since the second quarter, underlying price pressures have continued to rise.
However, the return to growth after two quarterly cuts in GDP proved the economy was not in recession, although the risk of a recession increased as the Fed doubled down on rate hikes to combat the fastest rising inflation in 40 years. .
“Despite the rosy headline number, a look under the hood paints a much grimmer picture for the U.S. economy,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. “While the full impact of past and future Fed rate hikes is still being felt, the economy appears poised for a modest recession in the first half of next year.”
Gross domestic product grew at an annualized rate of 2.6% last quarter after contracting at a 0.6% pace in the second quarter. Economists polled by Reuters had expected GDP growth to rise by 2.4%, with estimates ranging from 0.8% to 3.7%.
The trade deficit narrowed sharply as slowing demand curbed the goods import bill. During the quarter, the volume of exports also increased. The smaller trade gap added 2.77 percentage points to GDP growth, the largest since the third quarter of 1980.
Excluding trade, inventory and government spending, final sales to domestic private buyers rose just 0.1%, a sign that higher borrowing costs are starting to dampen demand. This was the slowest increase in domestic demand since the second quarter of 2020 and followed a 0.5% growth rate in the second quarter.
“GDP growth cannot be sustained without domestic private sector growth,” said Chris Lowe, chief economist at FHN Financial in New York.
The data is likely to have little impact on monetary policy, although Fed officials can take some comfort from the slowdown in demand. Data on personal consumption expenditures for September and third-quarter labor costs due Friday could weigh more heavily ahead of the U.S. central bank’s Nov. 1-2 policy meeting.
The Fed raised its benchmark interest rate from near zero in March to the current range of 3.00% to 3.25%, the fastest pace of policy tightening in a generation or more.
Stocks on Wall Street were a mixed trade. The dollar rose against a basket of currencies. US Treasury yields fell.
CONSUMER SPENDING SLOWS
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a 1.4% pace from a 2.0% pace in the April-June period.
The losses were due to lower goods, mainly motor vehicles, as well as food and beverages. This partly reflects a shortage of cars and a shift in spending to services. Costs for services increased due to health care and international travel.
Consumer spending is being supported by a strong labor market, which is leading to wage growth. The Labor Department on Thursday reported a slight increase in the number of people filing new claims for unemployment benefits last week.
Initial claims for unemployment benefits rose by 3,000 to a seasonally adjusted 217,000 in the week ended Oct. 22. Despite reports of layoffs at companies, mostly in interest-rate-sensitive sectors, claims remained fairly low.
Nancy Vanden Hooten, chief U.S. economist at Oxford Economics in New York, said: “While the economy is slowing, employers seem reluctant to lay off workers who are struggling to recruit and retain them. “We’re not looking for claims to fall much below current levels, but we’re not looking for a significant increase in claims or unemployment unless we go into a recession.”
Last quarter, companies increased spending on equipment such as trucks, planes and computers. But that momentum may be faltering, with the Commerce Department’s third report showing an unexpected drop in orders for non-defense capital goods excluding aircraft in September. Businesses have increased investment in software as well as research and development.
However, there were further cuts in the construction of trade and health facilities. Government spending rebounded after a five-quarter cut, driven by increases in defense spending and compensation for state and local government employees.
There was encouraging news on inflation. Economy-wide inflation increased to 4.6%, slowing from the 8.5% growth rate in the second quarter.
As a result, household disposable income, adjusted for inflation, rose 1.7% after falling 1.5% in the second quarter. Savings rate decreased from 3.4% to 3.3%.
But inflation remains uncomfortably high. The personal consumption expenditure index, excluding durable food and energy components, rose 4.5% after rising 4.7% in the previous quarter.
Retailers are dealing with excess goods due to reduced demand to cool goods and reduce bottlenecks in the supply chain, forcing them to slow their stockpiling pace.
Business funds increased to $61.9 billion after rising $110.2 billion in the second quarter. Funds subtracted 0.7 percentage points from GDP growth.
“Inventories that used to clog ports have moved into retailers’ warehouses when demand has weakened and job growth has slowed,” said Sung Won-son, a professor of finance and economics at Loyola Marymount University in Los Angeles. “While the inventory adjustment process is underway, the economy may slip into a recession.”
Report by Lucia Mutikani; Edited by Chizu Nomiyama, Andrea Ricci, and Paul Simao
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