The US economy recovered strongly in the third quarter amidst a shrinking trade deficit, but the nation’s economic health was overstated in the data as in two years, domestic demand was the weakest because of the aggressive interest rate hikes by the Federal Reserve.
Residential investment diminishing for a sixth straight quarter
The Commerce Department’s advanced third-quarter gross domestic product report on October 27 also showed residential investment diminishing for a sixth straight quarter, which is the longest such stretch since the housing market collapse in 2006, as the sector fastened under the weight of rising mortgage rates.
While overall inflation from the second quarter slowed to a great extent, underlying price pressures kept bubbling.
The return to growth after two straight quarterly decreases in GDP still offered evidence that there was not a recession in the economy, though there’s an increase in the risks of a downturn as the Fed continues to battle the fastest-rising inflation and doubles down on the rate hikes in 40 years.
Sal Guatieri who’s a senior economist at BMO Capital Markets in Toronto said, “A look under the hood shows a much horrendous picture of the US economy, despite if the shiny headline number, one that is evidently losing steam, With the overall effect of future and past Fed rate hikes still to be felt, It appears that the economy is poised for a modest decline in the next year’s first half”.
Gross domestic product rose at a 2.6 per cent annualized rate last quarter after shrinking in the second quarter at a 0.6 per cent pace. Economists polled by Reuters had forecast GDP growth would recover at a 2.4 per cent rate, with a range of estimates from as low as a 0.8 per cent rate to as big as a 3.7 per cent pace.
“Without domestic private-sector growth, GDP growth cannot be sustained”
The trade deficit reduced sharply as slowing demand restrained the goods import bill. Exports also rose during the quarter. The lesser trade gap added 2.77 percentage points to GDP growth, the highest after the third quarter of 1980.
Final sales to private domestic purchasers, which exclude inventories, trade, and government spending, grew at only a 0.1% rate, a sign that higher borrowing costs were beginning to erode demand. This measure of domestic demand was the slowest rise since the second quarter of 2020 and was followed in the second quarter by a 0.5 per cent rate of increase.
“Without domestic private-sector growth, GDP growth cannot be sustained”, said the chief economist at FHN Financial in New York, Chris Low.
The data will probably have less effect on monetary policy, though Fed officials could draw some support from the dwindling demand. Third-quarter labour cost numbers and personal consumption expenditures price data for September, due to be released on Friday, could carry more weight ahead of the November 1-2 policy meeting of the US central bank.
The dollar increased against a basket of currencies. Stocks on Wall Street were trading mixed, and US Treasury yields dropped.
Consumer Spending Slows
Rise in consumer spending, which accounts for more than two-thirds of US economic activity, slowed from the April-June period’s 2.0 per cent pace to a 1.4 per cent rate.
Spending was held back by a decrease in most motor vehicles, goods, as well as beverages and food. That partly reflects a shift in spending to services and motor vehicle shortages. Outlays on services grew, lifted by international travel and healthcare.
Consumer spending is being sustained by a strong labour market, which is raising wages. The Labor Department on Thursday reported a modest rise in the number of people filing new claims last week for unemployment benefits.
Nancy Vanden Houten, lead US economist at Oxford Economics in New York said, “Even as the economy slows down, employers are seen to be reluctant to lay off workers that they have struggled to retain and hire”.
“We don’t look for claims to decrease much below current levels, but we also don’t look for a significant increase in unemployment or claims either until we enter a recession,” she added.
Companies Fostered Spending on EquipmentÂ
Companies fostered spending on equipment such as aircraft, computers, and trucks last quarter. But that bounce could ebb, with the commerce department’s third report showing an unexpected decrease in orders for nondefense capital goods in September, excluding aircraft. Businesses also increased investment in research as well as software and development.
However, there were further cutbacks in the construction of healthcare and commercial structures among others. After five straight quarters of decline, there was a rebound in government expenditures, led by an increase in compensation for local government and state government workers as well as defence spending.
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