WASHINGTON – US economic growth likely rebounded in the third quarter, driven by a shrinking trade deficit, but that would grossly exaggerate the economy’s health as the Federal Reserve’s aggressive interest rate increases dampen demand.
The Commerce Department’s advance third-quarter gross domestic product on Thursday is expected to show underlying demand in the economy flat last quarter amid a slowdown in consumer spending and moderate growth in business investment.
Still, the anticipated rebound in growth after two straight quarterly declines in GDP would be 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.
“The devil is in the details, and if you strip out trade, GDP will look a lot weaker than the headline number suggests,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “We don’t have a recession in our baseline, but the risks are increasing; we’re going to need a little bit of luck.”
According to a Reuters survey of economists, GDP growth likely rebounded at a 2.4 percent annualized rate last quarter after contracting at a 0.6 percent pace in the second quarter.
Estimates ranged from as low as a 0.8 percent rate to as high as a 3.7 percent pace.
The trade deficit appears to have narrowed sharply in part as slowing demand curbed the import bill. Exports also increased for much of last quarter. Economists estimate that the smaller trade gap added as much as 3.0 percentage points to GDP growth.
The data will have little impact on monetary policy, with Fed officials watching September personal consumption expenditures price data and third quarter labor cost numbers due on Friday, ahead of their Nov. 1-2 policy meeting.
The US central bank has raised its benchmark overnight interest rate from near zero in March to the current range of 3.00 percent to 3.25 percent, the swiftest pace of policy tightening in a generation or more. That rate is likely to end the year in the mid-4 percent range, based on the Fed officials’ own projections and recent comments.
Wild swings in trade and inventories were behind the contraction in GDP in the first half of the year.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, is expected to have slowed to about a 1.0 percent rate from the April-June quarter’s 2.0 percent pace.
Consumer spending is being supported by a strong labor market, which is driving up wages. The Labor Department is expected to report on Thursday a modest increase in the number of people filing new claims for unemployment benefits last week, according to a Reuters survey.
Initial claims for unemployment benefits have remained significantly low despite reports of companies, mostly in the interest rate-sensitive sectors of the economy, laying off workers.
A modest rebound in business spending on equipment is predicted after it contracted in the second quarter. – Reuters
