The US economy recovered in the third quarter after contracting in the first six months of this year as a narrowing trade deficit masked weakening consumer demand.
Gross domestic product rose 2.6 percent year-on-year between July and September, exceeding economists’ expectations and marking a sharp reversal from the 0.6 percent drop in the second quarter of 2022 and the 1 .6 percent in the first three months of the year.
The expansion in the third quarter was driven by a narrowing trade deficit as declining consumer demand dampened imports while exports rose. That comes despite an increase in the goods deficit in September, as the strong US dollar weighed on exports. Consumer spending rose just 1.4 percent, much slower than the previous period, a sign that the economy is beginning to slow.
The data, released Thursday by the Commerce Department, effectively ends a debate that raged over the summer about whether the U.S. economy was already in recession, but it did little to allay fears that it will eventually turn into a recession, given the aggressive steps the US central bank is taking to eradicate high inflation.
Two consecutive quarters of contracting GDP has long been considered a common criterion for a so-called “technical recession”. However, top policymakers in the Biden administration and the Federal Reserve pushed back forcefully on that framing, citing abundant evidence that the economy was still rock solid.
The official arbiters of a recession, a group of economists from the National Bureau of Economic Research, characterize a recession as a “significant drop in economic activity that spreads across the economy and lasts longer than a few months.” They usually look at a wide variety of metrics, including monthly job growth, consumer spending on goods and services, and industrial production.
The Fed is poised to implement its fourth consecutive 0.75 percentage point rate hike early next month, which will push its policy benchmark rate to a new target range of 3.75 percent to 4 percent. As late as March, Federal Funds interest rates hovered around zero, making this tightening campaign one of the most aggressive in Federal Reserve history.
While the Fed may soon consider slowing the pace of its rate hikes, possibly as early as December, it isn’t expected to abandon monetary stance entirely.
Last month, most officials thought the Fed Funds rate would peak at 4.6 percent, but now investors expect it to hit 5 percent next year.
Given the major impact the Fed’s actions will have on growth and the labor market, most economists now expect unemployment to rise significantly from its current level of 3.5 percent and plunge the economy into recession next year. .
Top officials in the Biden administration insist the US economy is strong enough to avoid that outcome, citing the resilience of the job market, but even Fed chairman Jay Powell has acknowledged that the odds have risen.
“Nobody knows if this process will lead to a recession and if so, how big that recession will be,” he said at his last press conference in September.