Call it the calm before the storm.
After a contraction in the first half of the year, the U.S. economy rebounded from July to September even as inflation hovered near 40-year highs and interest rates rose sharply. But the performance could mark a moderation ahead of an expected recession next year, rather than a sign of a brighter outlook.
The strong performance was aided by a more favorable trade balance and modest gains in consumer and business spending, offsetting another slump in housing construction and weak business inventories.
“There is no denying that the U.S. economy is cooling,” Ernst & Young Parthenon chief economist Gregory Darko wrote in a note to clients.
Gross domestic product, the value of all goods and services produced in the U.S., grew at a seasonally adjusted annual rate of 2.6% in the third quarter, the Commerce Department said on Thursday. Bloomberg had forecast a 2.3% increase in output.
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The first and second quarters fell 1.6% and 0.6%, respectively, largely due to changes in business reserves and trade — two volatility categories that don’t usually reflect the health of the economy.
Will there be a recession in 2023?
While these contractions are in line with informal benchmarks for recessions, the National Bureau of Economic Research looks at broader economic activity, including employment, retail sales and industrial production, before determining when the recession begins and ends. Most economists don’t think the U.S. is in a recession, citing slower but still vibrant job growth.
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There is little doubt, though, that the economy is losing steam as households and businesses cut spending as inflation soars and the Federal Reserve hikes rates aggressively to moderate price increases.
The GDP report showed final sales excluding trade, inventories and government purchases – thus reflecting the underlying health of the economy – were almost flat, rising just 0.1% after rising 0.5% in the previous quarter.
Earlier this month, the government said employers added 263,000 jobs in September, but that was below the average of 382,000 in the previous three months.
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The economy is expected to grow moderately in the final three months of the year before contracting in the first and second quarters of 2023, according to economists surveyed this month by Wolters Kluwer Blue Chip Economic Indicators. Following last year’s 5.7% growth (a 37-year high), they expect growth to be just 1.6% this year and just 0.2% in 2023 as the economy reopens after COVID-induced shutdowns.

78% of economists expect a recession next year. While most think it will be mild, the risk of a more severe recession is rising.
Last quarter’s economic breakdown:
Trade drives GDP
Trade was a big positive last quarter after dampening growth earlier this year.
Exports rose 14.4% as U.S. manufacturers benefited from easing supply chain bottlenecks.
Meanwhile, imports fell 6.9% as consumers splurged on TVs, sofas, appliances and other goods during the pandemic.
Soaring exports and falling imports together narrowed the trade deficit and boosted overall growth.
But economists say the strong performance won’t last. The dollar strengthened due to rising U.S. interest rates and the relative strength of the U.S. economy compared to other countries. This is expected to hurt U.S. exports, making them more expensive for foreign buyers.
Consumer spending rises moderately
Americans reined in spending amid soaring food and rent costs, but they still showed resilience. Consumer spending, which accounts for 70% of economic activity, rose 1.4% on an inflation-adjusted basis after rising 2% in the second quarter.
Steady job and wage growth and the nearly $2 trillion in savings accumulated during the pandemic have supported households, although this is down from last year’s peak of $2.6 trillion. Consumers are shifting spending away from goods to services, such as travel and dining out, as fears over the coronavirus subside.
But consumption is expected to fall further next year as interest rates rise, inflation gradually moderates and job growth slows.
Business investment rebounds
Business investment rose 3.7% after inching up just 0.1% in the previous quarter.
Spending on computers, delivery trucks, factory machines and other equipment rose 10.8% as companies responded to strong consumer demand and caught up after spending cuts last quarter.
But spending on construction, oil rigs and other structures fell 15.3%, the sixth straight quarter of declines, as borrowing costs continued to climb and some companies struggled on recession fears.
Government spending rebounds
Government spending rebounded after five straight quarters of declines. Federal spending rose 3.7%, and state and local purchases rose 1.7%.
Property market plummets again
Home construction and renovations plunged 26.4%, the sixth straight quarter of declines.
The Federal Reserve’s rate hike pushed up mortgage rates, hitting home sales and construction. The fixed 30-year mortgage rate has jumped to just under 7% from about 3% earlier this year.
Reducing business reserves hurts growth
In response to supply chain bottlenecks and product shortages, companies ramped up inventories in the last year. Many retailers now have too many products and are expected to offer shoppers deep discounts to unload.
As a result, companies slowed or weighed down their stock additions last quarter, rising 0.7% after a nearly 2% gain in the previous quarter.
Here are other things you should know about GDP reporting:
How to Calculate GDP
One way to calculate GDP is to aggregate the spending or income of individuals and national governments over a given period of time
But textbook GDP is equal to the sum of private consumption, total private investment, government investment, government spending, and a country’s net exports, which are equal to the value of a country’s exports minus its imports. This equation represents the total value of all goods and services produced in a country.
The Bureau of Economic Analysis uses the second equation to calculate U.S. GDP each quarter. They also make seasonal adjustments, such as when people do holiday shopping, GDP doesn’t get too high in the last quarter of the year.
Which country has the highest GDP?
According to data released by the International Monetary Fund, the United States has the highest gross domestic product of any country in the world by which it is measured. The GDP of China and Japan ranked second and third respectively.
Which country has the lowest GDP?
Tuvalu is a country in the South Pacific consisting of nine small islands with the lowest gross domestic product.
What are the different types of GDP?
There are many different types of GDP. Two of the most important are nominal GDP and real GDP.
What is nominal GDP?
Nominal GDP does not take inflation into account. Think of it like the dollar amount you see on your salary.
What is real GDP?
Real GDP does take inflation into account, so you can think of it as the value of a salary based on the current level of inflation.
What is potential GDP?
There’s also potential GDP, which is an estimate of how much a country could produce under perfect economic conditions, such as maximizing employment, where every person who wants a job has one and every employer’s labor needs are met .
What is GDP per capita?
Another type of GDP is GDP per capita. It is similar to GDP except that only taxes paid by individuals are added to GDP and then divided by the total population of a country. This estimate shows how much each person produces in the country. It is also an indirect indicator of how much each person earns. The higher the number, the wealthier the individuals in the country.
According to the International Monetary Fund, Luxembourg currently has the highest GDP per capita.
Contributed by Elisabeth Buchwald