GDP grew at a 2.9% annual rate in the third quarter after declining in the first half of the year, the Bureau of Economic Analysis reported in an updated estimate.
The revision released Wednesday shows that growth was even better than the 2.6% seasonally adjusted annual rate previously reported.
“GDP was revised up modestly, but the key growth drivers of consumer spending and business investment in equipment are looking good despite the Federal Reserve ratcheting interest rates 375 bps higher this year. If the Fed is trying to slow the economy by hitting the brakes, they haven’t done enough yet,” said Chris Rupkey, chief economist at FWDBONDS.
The fact that GDP grew in the third quarter should temporarily allay fears that the country is in a recession after the first two quarters showed contraction.
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Two consecutive quarters of declining GDP commonly defines a recession. And some, particularly opponents of President Joe Biden, were quick to declare that the United States was indeed in recession. Still, the labor market was red-hot, and the unemployment rate was at the historic lows it notched just before the pandemic took hold.
Yet most economists predict that a recession is on the horizon, likely to hit the U.S. sometime next year as a result of the Federal Reserve’s aggressive interest rate hiking, which is designed to cool inflation but has the unfortunate side effect of slowing economic growth.
The October consumer price index report found that inflation grew 7.7% in the 12 months ending in October. While the pace is an improvement from previous months and might cause the central bank to ease off the gas a bit, it is still several magnitudes larger than is healthy.
Earlier this month, the central bank conducted another huge three-quarters of a percentage point, or 75 basis points, rate increase. It was the fourth such increase in just five months — the largest hike in four decades.
While the unemployment rate has remained below 4% this year, as the rate hikes begin to work their way through the economy, it will likely start to rise as Americans lose work.
While the broader economy still hasn’t fallen into a recession, the housing market appears to be in the throes of a downturn. As interest rates rise, so do mortgage rates, and the rising mortgage rates have made homes much more unaffordable for consumers, depressing demand.
The flailing housing market was a major downward pressure on GDP last quarter, with residential housing pulling the headline 2.9% growth rate figure down by a hefty 1.4 percentage points.
Sales of existing homes have fallen for a ninth straight month and are now at the lowest level since early in the pandemic. Existing home sales plunged by 5.9% in October to a seasonally adjusted annual rate of 4.43 million, according to a report by the National Association of Realtors.
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About 4 out of every 5 consumers describe homebuying conditions as bad, according to the University of Michigan’s consumer sentiment survey for this month. That is the highest number recorded by the survey, which goes back to 1978.
The Fed is set to meet next week, and all eyes will be on if officials decide to slow the intensity of their rate hikes. Economists are also closely watching Friday’s employment report to see signs that the labor market is beginning to crack under the weight of tightening monetary policy.
