The U.S. economy rebounded in the third quarter after contracting in the first six months of the year, with a narrowing trade deficit masking weak consumer demand.
Gross domestic product (GDP) grew at an annualized 2.6% in the July-September period, beating economists’ forecasts and sharply compared with a 0.6% drop in the second quarter of 2022 and a 1.6% drop in the first three months Years reversed.
The expansion in the third quarter was driven by a narrowing trade deficit, as falling consumer demand dampened imports while exports rose. The goods deficit widened in September as a stronger dollar weighed on exports. Consumer spending rose just 1.4%, well below the previous period, suggesting the economy is starting to slow.
Data from the Commerce Department on Thursday effectively ended a heated summer debate over whether the U.S. economy is already in recession, but it did not dispel fears that the U.S. economy will eventually slip into recession. The U.S. central bank is taking steps to curb rising inflation.
Two consecutive quarters of contraction in GDP have long been considered the common criterion for a so-called “technical recession.” However, top policymakers in the Biden administration and the Federal Reserve have strongly opposed the framework, citing ample evidence that the economy is still on its feet.
The official arbiter of recessions is a group of economists at the National Bureau of Economic Research, one of which they describe as “a marked decline in economic activity that spreads across the economy and persists for more than a few months.” They typically focus on a wide range of indicators, including monthly job growth, consumer spending on goods and services, and industrial production.
The Fed is poised to raise interest rates for the fourth time in a row by 0.75 percentage point early next month, which will raise its benchmark policy rate to a new target range of 3.75% to 4%. As recently as March, the federal funds rate hovered near zero, making this tightening one of the most aggressive moves in the history of the U.S. central bank.
While the Fed may soon consider slowing the pace of rate hikes, possibly as early as December, a complete break from tight monetary policy is not expected.
As of last month, most officials thought the federal funds rate would peak at 4.6%, but now investors expect it to be closer to 5% next year.
With the Fed’s actions expected to have a huge impact on growth and the labor market, most economists now expect the unemployment rate to rise sharply from its current level of 3.5%, with the economy heading into recession next year.
Top officials in the Biden administration have maintained that the U.S. economy is strong enough to avoid such an outcome, citing the elasticity of the labor market, but even Fed Chairman Jay Powell has acknowledged that the odds have risen.
“No one knows if this process will lead to a recession, or if it will, how severe it will be,” he said at his last news conference in September.