The U.S. economy grew at an annual rate of 2.6 percent in the third quarter, marking its first increase in 2022 and a sharp turnaround after six months of contraction.
The report on gross domestic product, released Thursday by the Bureau of Economic Analysis, revealed a more upbeat snapshot of the economy less than two weeks before the midterm elections, even as high inflation has proven a persistent problem for Democrats.
“The irony is, we’re seeing the strongest growth of the year when things are actually slowing,” said Diane Swonk, chief economist at KPMG.
Financial markets were mixed on the news, with the Dow Jones industrial average up and the Nasdaq down.
Even though consumers bought fewer goods, they continued to spend on health care, which helped lift the reading on GDP, which sums up goods and services produced in the U.S. economy.
The biggest boost, though, came from a narrowing trade deficit, with American retailers importing fewer items and exporting more goods as well as services, such as travel.
Trade-related benefits, though, are likely to be short-lived.
U.S. economy likely grew a lot last quarter. Most people didn’t notice.
“The makeup of GDP isn’t necessarily as positive as it looks on the surface,” said Jefferies chief financial analyst Aneta Markowska, who expects a recession in the second half of 2023. “It’s more of a one-time boost than growth that is likely to continue.”
Still, the turnaround comes at a crucial time for Democrats, who are racing to assuage voter concerns about the economy ahead of the mid-terms in early November.
On Thursday, President Biden lauded the positive GDP report while acknowledging that inflation remains a problem.
“Today we got further evidence that our economic recovery is continuing to power forward,” Biden said in a statement. “Our economy has created 10 million jobs, unemployment is at a 50 year low, and U.S. manufacturing is booming…Now, we need to make more progress on our top economic challenge: bringing down high prices for American families.”
Republican lawmakers were quick to push back. Economic growth, they said, was “fleeting” and likely to reverse in coming months.
“Key drivers of the economy such as investment and consumer spending shrunk again,” Rep. Kevin Brady (R-TX), the top Republican on the House Committee on Ways and Means, said in a statement. “These are alarming red flags for the current stagnant economy, signaling the worst is yet to come.”
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Consumer spending, which makes up more than two-thirds of the economy, grew at a slower pace in the most recent quarter.
Other headwinds included a slowdown in the housing market and a decrease in retail sales, particularly online.
Real final sales to domestic purchasers, a measure that strips out volatile components like government spending and trade, grew slightly, at an annual rate of 0.1 percent.
“We’ve seen very clearly a slowdown in consumer spending over the course of the year,” said John Leer, chief economist at Morning Consult. “There’s been a pretty dramatic reallocation of spending because of elevated levels of inflation. Consumers are devoting a larger share of their wallets to food, gas and housing, while pulling back in other areas.”
The positive report follows two quarters of contraction. That contraction met one definition of a recession, though the official determination is made by a private group of experts.
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.
For now, though, hiring remains brisk and the unemployment rate, at 3.5 percent, is near historic lows. And although consumers are pulling back on some items — such as homes, cars and appliances — they are continuing to spend on travel and dining out, which is helping prop up the economy.
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In the early months of the pandemic, Marc Sherman was not sure whether his general stores in Stowe, Vt., would survive.
Now he’s hoping that momentum carries through the holidays and ski season, through the quieter months of the winter and spring — and ultimately through rising fears of a recession.
“Our revenue is strong as ever, and we have a solid staff, so the increased revenue supports increasing all those wages,” Sherman said. “At the same time, we’ve seen no real slowdown. The drumbeat for a recession seems to get louder by the week, and yet we aren’t seeing anything in our business.”