US economic growth rebounded strongly in the third quarter amid a shrinking trade deficit, but that overstates the economy’s health as domestic demand was the weakest in two years because of the Federal Reserve’s aggressive interest rate hikes.
The Commerce Department’s advance third-quarter gross domestic product report on Thursday also showed residential investment contracting for a sixth straight quarter as the housing market buckles under the weight of surging mortgage rates. While overall inflation slowed substantially from the second quarter, price pressures continued to bubble.
Still, the rebound in growth after two straight quarterly declines in gross domestic product (GDP) was further evidence that the economy was not in a recession, though the risks of a downturn have increased as the Fed doubles down on rate hikes to battle the fastest-rising inflation in 40 years.
“Despite the shiny headline number, a look under the hood shows a much grimmer picture of the US economy, one that is clearly losing steam,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “With the full effect of past and future Fed rate hikes still to be felt, the economy appears poised for a modest downturn in the first half of next year.”
GDP increased at a 2.6 percent annualized rate last quarter after contracting at a 0.6 percent pace in the second quarter. Economists polled by Reuters had forecast GDP growth rebounding at a 2.4 percent rate. Estimates ranged from as low as a 0.8 percent rate to as high as a 3.7 percent pace.
The trade deficit narrowed sharply in part as slowing demand curbed the import bill. Exports also increased for much of the quarter. The smaller trade gap added 2.77 percentage points to GDP growth, the most since the third quarter of 1980.
David Vilnoiu 1720 