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GDP report shows US economy grew 2.6% in third quarter, but recession fears loom

By on October 27, 2022 0

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The US economy grew at an annual rate of 2.6% in the third quarter, marking its first increase in 2022 and a sharp recovery after six months of contraction – despite lingering fears that the country risks a recession.

Third-quarter gross domestic product figures, released Thursday by the Bureau of Economic Analysis, provide an upbeat snapshot less than two weeks before the midterm elections, in a year that has seen the economy and high inflation become a persistent challenge for Democrats.

“The irony is that we’re seeing the strongest growth of the year as things slow down,” said Diane Swonk, chief economist at KPMG. “There are real cracks in the foundation. Housing shrinks. The consumer slows down. GDP is growing, but not for all the right reasons.

Although consumers bought fewer goods, they continued to spend on health care, which helped boost GDP. An increase in government spending at the federal, state and local levels also contributed to the gains.

The biggest boost, however, came from a shrinking trade deficit, with US retailers importing fewer items and exporting more goods as well as services, such as travel. This is a sharp reversal from the start of the year, when the gap between incoming and outgoing goods was at its widest on record.

However, the trade-related benefits are likely to be short-lived. Economists widely expect GDP growth to slow in the coming months as consumers and businesses continue to shrink in the face of rising interest rates and heightened uncertainty. By next year, many are predicting a more prolonged slump and possibly even a recession.

The US economy probably grew a lot in the last quarter. Most people didn’t notice.

“The composition of GDP is not necessarily as positive as it first appears,” said Aneta Markowska, chief financial analyst at Jefferies, who expects a recession in the second half of 2023. “C It’s more of a one-time boost than growth that is likely to continue.

The latest report also reflects the consequences of rising prices. Although Americans continued to see their wages rise, their savings took a hit, as families tried to keep pace with high inflation for decades. Overall prices have increased 8.2% last yearalthough the cost of many basic necessities, including food and gas, has risen at much higher rates.

Other headwinds include a slowing housing market and lower retail sales, especially online.

Still, the positive report follows two quarters of contraction. This contraction met a definition of a recession, although the official determination is made by a private group of experts. The US economy contracted 1.6% in the first quarter and then 0.6% in the second, according to revised government estimates.

The rebound in output comes at a time when the Federal Reserve is aggressively raising interest rates in hopes of slowing growth enough to contain decades-high inflation. The central bank has raised borrowing costs five times since March and is expected to do so again next week. The longer the labor market remains tight – and inflation persists – the more the Fed may have to raise rates higher and for longer, raising the risks of a recession.

For now, however, hiring remains buoyant and the unemployment rate, at 3.5%, is near historic lows. And although consumers are pulling back on certain items — like homes, cars and appliances — they are still spending on travel and dining out, which helps support the economy. Although business owners say they are worried about the uncertainties ahead, many say they have yet to notice a marked slowdown in demand.

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In the early months of the pandemic, Marc Sherman wasn’t sure his general stores in Stowe, Vermont would survive. But since tourism has picked up, Stowe Mercantile’s business has been booming. Sherman has hired two more employees in the past month because sales have been so strong.

Now he hopes that momentum will continue through the holidays and ski season, through the calmer winter and spring months – and ultimately through growing fears of a recession. His plan is to retain as many staff as possible, even when tourism dwindles, so he doesn’t have to find and retrain new employees until the summer.

“Our revenues are stronger than ever and we have strong staff, so the increase in revenues supports the increase in all of those salaries,” Sherman said. “At the same time, we haven’t seen any real slowdown. The drumbeat of a recession seems to get louder every week, and yet we see nothing in our business.

Rachel Siegel contributed to this report.