The Line: Economic Growth Stronger than Expected in 3Q22
Updated: Nov 1, 2022
Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Real Gross Domestic Product grew at a 2.6% annual pace in the third quarter, higher than the 2.3% forecast. This was the first quarterly growth in GDP since the fourth quarter of 2021.
The big drivers of growth last quarter were increasing exports (+14.4%), government spending (+2.4%), and consumer spending (+1.4%). Residential investment—which is basically housing construction—was the biggest drag on growth in 3Q22, contracting at a 26.4% annual rate. You can find all the fun details of the report at this link. So, basically a pretty good report, but not without concerns. Residential investment has now posted declines of 26.4% and 17.8% in the past two quarters. Ouch. The somewhat good news is that it accounts for only about 3%-5% of GDP, so at least for now it’s not preventing the economy from expanding. The really bad news is that I, and many of you, work in housing! Consumer spending—which accounts for almost 70% of GDP—is the biggest concern these days for obvious reasons. While still a positive contributor to growth, a 1.4% annual rate of growth is worrisome, and that number will go lower as inflation and Fed hikes drag on. Remember that retail sales were unchanged last month, and since that number is not adjusted for inflation—like GDP is—it means people are somehow managing to spend the same amount of money while getting fewer goods and services. Enough of the technical mumbo-jumbo, Greg. Does this report mean we’re still not in recession? Yes. Consumer spending is weakening, and we are most likely headed for a recession next year, but so far Americans are still finding a way to buy things. As I said in my column on second-quarter GDP, two straight quarters of economic contraction are no longer the definition of a recession, so ignore the first- and second-quarter 2022 GDP contractions. That fact, combined with the 263,000 jobs added in September and a 3.5% unemployment rate, tell me we still a have a while to go before we can call this a recession. What is the real chance of recession next year? For that answer, let’s look at two reports released last week. A Bloomberg Economics forecast model found that there is 100% probability of a recession in the next 12 months. That pretty much says it all right there. But, if that isn’t enough to scare you, a few days later, KPMG released a survey of 1,325 CEOs that found 91% of them were convinced a recession is coming in the next 12 months. Since CEOs control spending and hiring, a recession could soon become a self-fulfilling prophecy. I know this sounds bleak, but don’t let it get you down. If the Fed can bring inflation down quickly enough, we may see fewer rate hikes and at worst experience only a brief recession. How long does the typical recession last? Since the Great Depression, recessions have averaged 10.4 months, or for you sports fans, about two months longer than a baseball season. Enough of the "R" word for one day. For now, just enjoy yesterday’s good economic news and have a great weekend.