US economy grows for first time this year in third quarter

WASHINGTON: The US economy rebounded in the third quarter, government data showed on Thursday (Oct 27), in welcome news for President Joe Biden days before midterm elections, though analysts warn of a gloomier path ahead.

Economic issues have become a flashpoint in the United States, with decades-high inflation weighing on growth and squeezing households.

Fears of a downturn have intensified in the world’s biggest economy after two quarters of negative growth, commonly viewed as a strong signal that a recession is under way – a trend that would have global consequences and domestic political costs.

But gross domestic product (GDP) rose for the first time this year, at an annual rate of 2.6% in the July to September period, according to the latest Commerce Department data.

“Our economic recovery is continuing to power forward,” said Biden in a statement, later telling reporters that “things are looking good”.

But he also said that officials need to “make more progress” on bringing down high costs for American households.

On Thursday, mortgage rates surged past 7% for the first time in two decades according to the Freddie Mac survey, piling further pressure on potential home buyers.

The better-than-expected GDP performance was helped by strong trade, but housing investment plunged and weaker consumer spending on goods casts a pall on growth as higher prices bite.

Industrial supplies and materials, notably petroleum and products, kept exports robust.

In consumer spending, an increase in services was “partly offset” by a drop in products like motor vehicles and parts, along with food and beverages, data showed

The leap in exports is “unsustainable”, as a strong dollar and weak global growth will pose constraints moving forward, cautioned Ian Shepherdson of Pantheon Macroeconomics.

A fall in imports that helped net trade also marks a reversal of earlier inventory rebuilding, but that is now over, he said.

“We’re relying on better consumption, rising government spending, and ... investment to keep GDP in the black,” he added.

Overall, personal consumption expenditures – a key segment of the economy – grew 1.4%, slower than before.

The US economy shrank 0.6% in the second quarter, according to revised numbers, after a larger decline in the first three months this year.

“This will likely be the only positive quarter for the entire year,” said economist Diane Swonk of KPMG in a tweet.

While there is still some momentum in household spending and a rebound in business investment, there is also “ongoing weakness in residential investment”, added Rubeela Farooqi of High Frequency Economics.

There are particular risks to consumption “as households continue to face challenges from high prices and likely slower job growth going forward”, she said in an analysis.

Households have been reeling from decades-high inflation, with prices soaring on supply chain snarls due to Covid-19 lockdowns and fallout from Russia’s invasion of Ukraine, which sent food and energy costs rocketing.

US Treasury Secretary Janet Yellen said on Thursday the latest GDP data shows strength in the US economy but also some evidence of a healthy slowdown that could have a positive impact on fighting high inflation.

Speaking to reporters on a trip to Cleveland to tout the Biden administration’s economic policies, Yellen said she still does not anticipate a recession, but the US government has fiscal capacity to respond to economic weakness if appropriate.

“This is certainly a full employment economy with a hot labour market, which is good, but we want to see growth slow,” Yellen said. “It’s part of getting inflation under control.”

“I’ve said many times I see a path to bringing inflation down while maintaining a strong labour market. And I think this data is consistent with what we would want to see,” she added.

Yellen said that she expects the economy to slow further, and the government has fiscal space to respond if necessary, but cautioned that this should not work against monetary policy.

“We need to be careful not to use fiscal policy to exacerbate an inflationary problem,“ Yellen said. “But if there were – which I don’t expect – but if there were a deep recession, that was something that called for a response, I think we continue to have enough fiscal space to do so.” – AFP, Reuters

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