US Economy Grew 2.6 Percent in 3rd-Quarter Estimate but Future Outlook Cloudy

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Oct. 7, 2022. Brendan McDermid/Reuters

The U.S. economy rebounded in the third quarter after contracting for the first six months of this year, giving fuel to the view that the world’s largest economy may not be in a recession. However, mounting signs of economic weakness suggest it may well dive again into negative territory.

The economy expanded at a 2.6 percent annualized pace between July and September, according to government data released on Oct. 27. That’s slightly higher than a consensus forecast of 2.4 percent.

The rebound in gross domestic product (GDP) represents a sharp reversal from the 1.6 percent decline in the first quarter and a 0.6 percent drop in the second, which met the technical definition of a recession, sparking fierce debate about whether the economy was, in fact, in recession.

The GDP number is an “advance” estimate, with several revisions to come before a second estimate is released on Nov. 30.

The White House dismissed the claim that the economy had dipped into a recession earlier this year after the second-quarter GDP print came in negative, citing the standard used by the official arbiters of U.S. recessions, a panel of economists at the National Bureau of Economic Research that uses a broader-based definition than solely GDP.

At the time, Treasury Secretary Janet Yellen reinforced President Joe Biden’s view that America’s economy hadn’t, in fact, fallen into a recession.

“That is not what we’re seeing right now when you look at the economy. Job creation is continuing, household finances remain strong, consumers are spending, and businesses are growing,” Yellen said in a July 28 press conference, during which she insisted that “most economists and most Americans” define a recession as a “broad-based weakening” of the U.S. economy that includes businesses shuttering in significant numbers and mass layoffs.

But since then, America’s economic woes have hardly gone away. Inflation, running close to a 40-year high, is crushing household budgets. Rising interest rates have cooled the previously red-hot housing market and economists have increasingly warned that potential Federal Reserve overtightening could inflict punishing damage to the economy more broadly, including around unemployment.

Unemployment to Rise as Fed Tightens

After initially downplaying rising inflation as a “transitory,” the Fed has moved aggressively to tighten monetary settings and stamp out surging price pressures. But the impact of rate hikes has been limited, prompting Fed officials to repeatedly say more tightening is in the pipeline.

With all the tightening underway, Fed policymakers expect that the economy will slow and unemployment will push higher from the current 3.5 percent to 4.4 percent in 2023 and 2024.

But a recent analytical note from Deutsche Bank says the Fed is low-balling its estimate on how many Americans will have to lose their jobs as the central bank corrects its course.

“Our updated analysis continues to point to the need for a sharper rise in unemployment than embedded in the Fed’s latest projections for September,” Deutsche Bank analysts wrote, predicting unemployment to jump as high as 6 percent by the end of 2023.

Unemployment at 6 percent would mean around 4 million Americans losing their jobs.

Market analyst and trader Sven Henrich said in a series of Twitter posts on Oct. 27 that the Fed’s projection for joblessness to peak at 4.4 percent from the current 3.5 percent is without precedent.

“There is no example where the unemployment rate peaked at 4.4% coming from 3.5%. None. Rather the peaks following such low readings ends in at least 6%-8% or worse. So the Fed is clinging to a soft landing no recession narrative despite all history,” he wrote.

Henrich argued that the Fed should hit pause on its rapid rate increases to assess their effects on the economy.

“The Fed would be well advised to slow down and assess the lag effects. If not, things, could well get ugly. Bottomline: Still lots to assess in the months to come as massive risks remain,” he said.

Besides rapid Fed rate boosts having the potential to drag the economy down in the fourth quarter and beyond, there are other clouds on the horizon.

Stagflationary winds in the United States have intensified, with recent data from the Federal Reserve Bank of Richmond showing a sharp drop in manufacturing activity at the same time as inflationary pressures grew.

There’s also the fact that a major contributor to the relatively strong showing for third-quarter GDP was an unusually high net export figure, which experts say is unlikely to be the case going forward.

“Net exports contributed 2.8% to 3Q22 GDP, most since 3Q80,” Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., wrote in a tweet, adding that this is “unlikely to persist as positive driver” of growth going forward.