GDP report shows U.S. economy grew 2.6% in the third quarter, but recession fears loom


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 — despite lingering fears that the country is at risk of a recession.

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 proved 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. “There are some real cracks in the foundation. Housing is contracting. The consumer is slowing. GDP is growing, but not for all of the right reasons.”

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. An increase in government spending at the federal, state and local levels also contributed to the gains.

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. That is a stark reversal from earlier in the year, when the gap between incoming goods and outgoing ones was at its widest on record.

Trade-related benefits, though, are likely to be short-lived. Economists widely expect GDP growth to slow in the coming months as consumers and businesses continue pulling back in the face of rising interest rates and uncertainty. By next year, many are forecasting a more protracted slump and perhaps even a recession.

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“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.”

A number of recent indicators point to a broader cooling of the economy, most notably in the housing market. Home sales have tumbled for eight straight months and are likely to keep falling because of rising interest rates. And average mortgage rates for 30-year loans exceeded 7 percent for the first time since the early 2000s, Freddie Mac reported this week.

Meanwhile, Amazon on Thursday became the latest tech giant to post disappointing earnings. A slowdown in online sales and a weak fourth-quarter forecast sent shares of the company’s stock plunging nearly 20 percent in after-hours trading. (Amazon founder Jeff Bezos owns The Washington Post.)

Still, the turnaround in GDP comes at a crucial time for Democrats, who are racing to assuage voter concerns about the economy ahead of the midterms in early November. Inflation — with gas prices in particular — has been one of the biggest political challenges for the White House.

Post reporters Damian Paletta and Rachel Siegal explain how economic downturns begin. (Video: Hope Davison, Drea Cornejo/The Washington Post, Photo: Michael S. Williamson/The Washington Post)

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, adding, “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 of Texas, the top Republican on the House Ways and Means Committee, 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. Although Americans continued to see wage increases, their savings took a hit as families tried to keep up with decades-high inflation. Overall prices have risen 8.2 percent in the past year, though the cost of many necessities, including food and gas, has grown at much higher rates.

Other head winds 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 such as government spending and trade, grew slightly, at an annual rate of 0.1 percent. That’s down markedly from early in the year, when it rose by 2.1 percent, and shows that underlying economic growth is decelerating.

“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. Those declines met one definition of a recession, though the official determination is made by a private group of experts. The U.S. economy shrank by 1.6 percent in the first quarter, then 0.6 percent in the second, according to revised estimates from the government.

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. The central bank has increased borrowing costs five times since March and is expected to do so again next week. The longer the labor market remains tight — and inflation persists — the more the Fed might have to raise rates higher and for longer, raising the chances of a recession.

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.

A range of major companies, including Bank of America, Johnson & Johnson and Lockheed Martin, have reported better-than-expected sales and profits in recent weeks, reflecting strength in the corporate sector. However, many executives say they are bracing for uncertainty ahead, as inflation and higher interest rates ripple through household budgets.

At McDonald’s, for example, customers are buying fewer items per transaction and are trading down from meals to lower-priced items. Executives there said this week they expect “a mild to moderate” recession in the United States and a deeper one in Europe.

“It goes without saying that we are seeing global macroeconomic challenges that haven’t been experienced in many years,” Ian Borden, the company’s chief financial officer, said in a Wednesday earnings call. “Inflationary pressures and related interest rate increases taken by central banks are combining to put significant pressure on the consumer and our industry.”

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Other business owners say they have yet to see changes in consumer behavior. Smaller outfits in particular say they are still struggling to find enough workers and are doing everything they can to keep the ones they do have, even if there are modest drops in demand.

After an early-pandemic lull, business has been booming at Stowe Mercantile in Stowe, Vt. Owner Marc Sherman has hired two workers in the past month to keep up with strong sales at his general stores.

Now he’s hoping that momentum carries through the holidays and ski season and into the quieter months of the winter and spring. His plan is to hold on to as much staff as possible, even when tourism ebbs, so he does not have to find and retrain new staffers going into the summer.

“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.”

Rachel Siegel contributed to this report.