Gross domestic product grew at a 2.6% annual rate in the third quarter after declining in the first half of the year, the Bureau of Economic Analysis reported Thursday morning, an uptick that should temporarily allay fears the United States is in recession.
The increase in GDP comes amid fears that the country faces a recession thanks to the Federal Reserve‘s efforts to raise interest rates to slow economywide spending in order to bring down inflation.
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Thursday’s report showed that household spending is decelerating but still holding up, an encouraging sign for the overall health of the economy but also an indication that the most significant effects of the Fed’s campaign have yet to take hold.
The housing market, though, is clearly taking a massive hit from the rate hikes, which have translated into much higher mortgage rates. Housing investment shrunk at a massive 26.4% annual rate.
“Looking ahead, risks are to the downside, to consumption in particular, as households continue to face challenges from high prices and likely slower job growth going forward,” wrote Rubeela Farooqi, chief U.S. economist for High Frequency Economics.
One note of caution is that net exports added a whopping 2.77 percentage points to the headline GDP growth rate. Trade has been a tailwind but is likely to be a headwind in the months ahead, thanks to the strengthening of the dollar, which makes it harder for foreign purchasers to afford American goods.
President Joe Biden touted the report Thursday morning.
“For months, doomsayers have been arguing that the US economy is in a recession and Congressional Republicans have been rooting for a downturn,” he said in a statement. “But today we got further evidence that our economic recovery is continuing to power forward.”
Still, the reprieve may only be temporary.
Much more monetary policy tightening is in store from the Fed, a prospect that many economists fear will slow spending enough to push the economy decisively into recessionary territory. The central bank is expected to implement another 0.75-percentage-point hike in its interest rate target at its meeting next week.
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Further large rate hikes are expected as long as inflation remains well above the Fed’s 2% target. Inflation stood at 6.2% in August, according to the personal consumption expenditures index favored by the Fed. The September numbers will be released Friday morning.
“We still expect real GDP to contract in the fourth quarter, signaling the start of a mild recession that we expect to carry into early next year,” noted Cailin Birch, global economist at the Economist Intelligence Unit, citing the pressures from rising interest rates.
