US Economy Grows 2.6% in Third Quarter, GDP Report Shows


The U.S. economy grew in the third quarter, but showed signs of a broad slowdown as consumer and business spending fell amid high inflation and rising interest rates.

The Commerce Department said Thursday that gross domestic product — a measure of goods and services produced domestically — rose an annualized 2.6% in the third quarter after falling in the first half of the year.

Trade was the biggest contributor to the third-quarter turnaround, as the U.S. exported more oil and natural gas after the Ukraine war cut off supplies in Europe. Consumer spending, the main engine of the economy, increased compared to the previous quarter, but at a slower pace.

Businesses cut spending on buildings and residential investment fell 26.4% year-on-year, the department said.

Stocks were mixed after the GDP release and earnings announcements. Treasury yields fell.

Economic uncertainty is rising and many economists are worried about the possibility of a recession in the next 12 months. They expect the Federal Reserve’s efforts to combat high inflation by raising interest rates to further weigh on the economy.

“The overall health of the economy is deteriorating, and much of that is just the weight of elevated inflation and high interest rates,” said Richard F. Moody, chief economist at Regions Financial. Corp.

“I don’t think we’ve seen the full impact of higher rates hit the economy, so we have fairly low expectations for the next couple of quarters.”

Contributions to growth

Net exports and a narrowing trade deficit led growth in the third quarter, while consumers contributed less than in the previous quarter.

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The US is not the only part of the world facing economic problems. The European Central Bank on Thursday raised its key interest rate from 0.75% to 1.5% as it also seeks to tame inflation in a region teetering on the brink of recession.

One of the sectors most sensitive to interest rates – housing – is showing signs of pain. Home sales posted their longest streak of declines in 15 years, and the average rate on a 30-year fixed-rate mortgage topped 7% on Thursday for the first time in more than 20 years.

Economists do not expect export growth to continue in the third quarter, given a stronger dollar and a weakening global economy. Many point to final sales to private domestic buyers, a measure of consumer and business spending that measures underlying demand in the economy, as a sign of a broader economic slowdown. It rose 0.1% year-on-year in the third quarter, after rising 0.5% in the second quarter and 2.1% in the first.

Some of the economic slowdown this year reflects a return to a more normal growth rate after expanding at an unusually fast 5.7% last year as the economy recovered from earlier pandemic disruptions.

The trajectory of the economy largely depends on how consumers behave in the coming months.

Bank of America Corp. Chief Executive Brian Moynihan said on an earnings call in October that high inflation and rising interest rates have done little to undermine the health of the American consumer. The company’s data shows that consumers continue to spend more. They have more money in the bank than before the pandemic.

Consumers benefit from a tight labor market. Employers are holding on to workers, with jobless claims remaining low last week. Many businesses are also raising wages as they struggle with staffing shortages.

“Wage growth is up, which is good for consumers and it helps their balance sheet,” said Mark Begor, CEO of credit reporting company Equifax. Inc.

on the earnings call this month. “Obviously, inflation is the bad guy, and it’s hurting a lot of consumers. But even with inflation, consumers are still there spending money, traveling and doing everything they do in their lives.

Still, consumers may start cracking up. Kathy Bostjancic, chief U.S. economist at Oxford Economics, said many are tapping into pandemic savings and turning to credit cards more to finance spending.

The consumer sentiment index and the consumer confidence index attempt to measure the same thing: the feelings of consumers. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

But with higher interest rates, “there’s really a limit to how much consumers can rely on their credit cards,” he said.

Some companies are seeing consumer pullbacks, particularly in sectors that benefited from pre-pandemic consumption of consumer goods. Sales at Altus Brands LLC are down about 25% this year compared to the same period in 2021, said Gary Lemanski, owner of Grawn, Mich., which makes and sells hunting, shooting and outdoor accessories.

Many of the factors that drove sales growth in 2020 and 2021 — consumers’ extra cash from government stimulus, time at home to get out in the woods, and lack of opportunity to spend on services including travel — have since disappeared. , he said.

Inflation is causing many consumers to cut back on discretionary purchases of products Altus sells, such as electronic hearing protection headphones, Mr. Lemansky said.

“I talk to a lot of people and you hear it over and over again: it’s harder to make a living,” he said.

Many tech companies are feeling the effects of a slowing economy. Facebook parent Meta Platforms Inc. posted its second straight revenue decline as the social media company grappled with tough macroeconomic conditions that weighed on advertiser spending. Microsoft Corp.

said it expects a sharp decline in PC sales and that the strength of the dollar will continue to affect growth.

A series of rate hikes have rippled through the US economy, and more are predicted to be on the way. WSJ breaks down the numbers hitting Americans’ wallets this year and beyond. Photo: Elise Amendola/Associated Press

Inflation dampens some consumers’ appetite for big-ticket purchases. Most Americans say it’s a bad time to buy a car or a large household item like furniture, a refrigerator, or an oven.

CarMax,

The used car retailer reported a more than 50% drop in profits in its most recent quarter as tough economic conditions hit consumers hard.

“This quarter reflects the broader pressures facing the used car industry,” the company’s CEO, William Nash, said in an earnings call. Higher prices, rising interest rates and low consumer confidence “led to a decline in used car sales across the entire market,” he said.

write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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