The US economy bounced back last quarter after shrinking in the first half of the year

By Alicia Wallace, CNN Business

The US economy grew last quarter, bouncing back after shrinking in the first half of the year — but there are indications that consumer spending, which powers the US economy, is starting to soften.

Gross domestic product — the broadest measure of economic activity — rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. That’s a turnaround from a decline of 1.6% in the first quarter of the year and negative 0.6% in the second.

Economists had projected third-quarter growth of 2.4%, according to consensus estimates on Refinitiv.

President Joe Biden on Thursday hailed the GDP rebound, describing the report as “further evidence that our economic recovery is continuing to power forward.”

While the economic growth underscores that the United States is not currently in a recession, economists cautioned that the latest GDP report doesn’t mean one isn’t imminent.

Much of the gains were fueled by a rebalancing of imports and exports, with fewer foreign goods shipped to the United States as consumers shifted their attention away from pandemic-fueled spending on sofas, bikes and other durable goods and turned to travel and dining out.

Consumer spending grew by 1.4% on an annualized basis which, though better than expected, marks a slowdown from the first two quarters.

“Excluding the more volatile categories, the trajectory for growth looks weak,” Jeffrey Roach, chief economist for LPL Financial, said in a statement. “A deteriorating housing market and nagging inflation, along with an aggressive Federal Reserve, put the economy on unsure footing for 2023.”

‘Mirror effect’ of the first two quarters

While back-to-back quarterly contractions like we saw in the first half of the year meet one technical definition of a recession, economists note that a true recession is a deeper, longer, broader decline in economic activity. During the first two quarters of this year, the labor market was hot, consumer spending was growing and business investment remained strong.

But, just as the decline in GDP in the first half of the year did not appropriately reflect that robust activity, the surge in the third quarter masks a potential slowdown.

The biggest variables for the past nine months have been net exports and inventories, two categories that ordinarily don’t have such an outsized influence.

“It’s the mirror effect of what we saw in Q1 and Q2,” said Andrew Patterson, senior international economist at Vanguard.

In the first six months of the year, the trade deficit widened as reliance on imports grew because US manufacturing couldn’t meet the surging demand for goods, and businesses’ inventory levels were negatively impacted by snarls in the supply chain.

However, in the third quarter, trade and inventories improved: Supply chain issues are fading and the trade gap has narrowed as consumer spending has shifted toward services and away from goods, leading to fewer imports.

The latest report, which showed a decline in imports coupled with decreases in housing investments and a slowdown in consumer spending, is a reflection of a broader easing of demand, Patterson said.

That’s something the Fed has been hoping to see as it enacted a series of blockbuster rate hikes aimed at pulling down historically high inflation.

“This is another sign that Fed policy is having the intended impact,” he said.

Despite the swing in the headline GDP, conditions on the ground for consumers haven’t changed much, and concerns for an economic downturn remain.

“I do think there’s roughly a 50-50 probability of recession in 2023,” said Gus Faucher, senior vice president and chief economist at the PNC Financial Services Group. “We are starting to see job growth slow; housing is becoming more of a drag; consumer spending growth, although that’s holding up, is also slowing; and there’s a potential that as interest rates move even higher through the rest of this year, that we could see a recession some time next year.”

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