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Despite 2.6% Growth in Q3, Experts Say Recession Looms

Despite 2.6% Growth in Third Quarter, Experts Say Recession Looms
A woman stands in front of produce at a grocery store | Image by Shutterstock

The U.S. economy rebounded in the third quarter, following consecutive reports of negative growth in the year’s first half.

Gross domestic product (GDP) — the broadest measure of economic activity created through the production of goods and services in the United States – increased at an annual rate of 2.6% in the third quarter of 2022 after decreasing 0.6% in the previous quarter, according to the Commerce Department’s third-quarter GDP report.

The rise in GDP can be attributed to “increases in exports and consumer spending, which were partly offset by decreases in housing investment,” the Commerce Department said Thursday.

Economic performance in the third quarter flashed mixed signals for economists surveyed by The Wall Street Journal, who cautioned against labeling the data as a “bounce back” due to slowing consumer spending.  Consumer spending, which accounts for roughly 70% of economic activity, increased at an annual rate of 1.4% from July to September, slightly down from the 2% rate reported in the second quarter.

A 14.4% annual increase in exports heavily contributed to the 2.6% rise in third-quarter GDP, according to the U.S. Bureau of Labor Statistics (BLS). In addition, the U.S. reported a 2.4% increase in government spending, which had a boost from higher defense spending due to the conflict between Russia and Ukraine,

The U.S. economy won’t be bouncing back soon, Rubeela Farooqi, chief U.S. economist at High Frequency Economics, indicated in a research note.

“Looking ahead, risks are to the downside,” said Farooqi, “to consumption in particular, as households continue to face challenges from high prices and likely slower job growth going forward.”

The U.S. Federal Reserve has raised interest rates five times in 2022 with an additional rate hike set for November and another expected in December, all in the hopes of lowering inflation, which is hovering near a 40-year high.

With consecutive quarters of negative economic growth in the year’s first half, the United States technically met the widely accepted criteria for a recession. However, the National Bureau of Economic Research (NBER) typically makes the official determination whether the U.S. is expanding or contracting, defining a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The NBER has yet to declare a recession since the COVID-19 recession of 2020.

Paul Ashworth, chief North American economist at Capital Economics, does not expect this strength to be sustained, despite the 2.6% rebound in the third quarter.

“Exports will soon fade, and domestic demand is getting crushed under the weight of higher interest rates,” Ashworth told CNBC. “We expect the economy to enter a mild recession in the first half of next year.”

The decline in home sales and the sharp fall in stock prices have increased the perception that the U.S. is steering itself toward a recession next year, with both assets experiencing their worst performance since the 2008 recession.

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