President Joe Biden takes a victory ride after a new report showed the US economy expanded in the third quarter after six months of contraction — but economists warn signs of growth may be illusory.
The Commerce Department said Thursday that real gross domestic product, a measure of all economic output in the country, increased 2.6 percent from July to September after two consecutive quarterly declines.
The rally was mostly due to a rebound in the same technical factors that drove the first-half decline, such as the trade balance and private inventories, which can fluctuate without indicating the underlying health of the economy.
However, Biden, who has strenuously denied that the economy was in a recession after two consecutive quarters of contraction, was quick to take credit for the reversal and call it evidence of a strong recovery.
“For months, pessimists have been arguing that the American economy is in a recession and that Republicans in Congress are heading for a recession,” Biden said in a statement.
“But today we have more evidence that our economic recovery continues to move forward,” he added.
President Joe Biden takes a victory ride after a new report shows the US economy expanded in the third quarter after six months of contraction — but economists warn signs of growth may be illusory.
Real gross domestic product, a measure of all economic output in the country, rose 2.6% in the third quarter after two consecutive quarterly declines.
In his statement, Biden also takes credit for lower gas prices, which fell from June highs of more than $5 a gallon, to a national average of $3.79 earlier this week.
“Now, we need to make more progress on our biggest economic challenge: lowering high prices for American households,” Biden said.
However, economists have expressed concerns that the economy is on shaky ground, and doubted that the latest GDP report represented healthy growth.
Mark Zandi, chief economist at Moody’s Analytics, states, “If you take a step back and look at GDP, it hasn’t effectively gone anywhere over the past year.” NPR.
“A quarter or two is down a little bit. This quarter, it’s a little bit over. But the network, we’re kind of treading water,” he said.
Thursday’s GDP result, which is preliminary, reflected an annual decline of 1.6 percent in the January-March period and 0.6 percent in the April-June period.
Consecutive quarters of declining economic output is one of the informal definitions of a recession — but Biden has insisted the US has not entered a recession.
Also, most economists say they believe the economy has weathered recession so far, pointing to a strong job market and steady spending by consumers.
However, the majority of economists and executives say a recession is likely within the next year, as the Federal Reserve continues to aggressively raise interest rates to fight inflation.
“Real GDP rose in the third quarter, but I don’t expect that growth to continue later this year or early next year,” John Lear, chief economist at decision intelligence firm Morning Consult, told DailyMail.com.
Lear noted that most of the growth in the third quarter was driven by increased exports as global trade reopened, but noted that “weak global demand combined with a relatively strong US dollar is likely to significantly limit export growth.”
“Consumer spending is also at risk,” he added. Since peaking in 2020 after the passage of the CARES Act, household personal savings has fallen from $4.9 trillion to $626 billion. Without this war chest, consumers are likely to slump in the coming months.
While the economy may not be in recession, the risks of a sharp deflation have increased as the Federal Reserve doubles down on raising interest rates to fight the fastest-rising inflation in 40 years.
The US central bank raised its benchmark overnight rate from near zero in March to the current range of 3 to 3.25 percent, the fastest pace of tightening in a generation or more.
Inflation remains near four-decade highs, and the Federal Reserve has aggressively raised interest rates to rein in prices
To fight inflation, the US central bank raised the key overnight rate from nearly zero in March to the current range of 3 to 3.25 percent, the fastest pace of tightening in a generation or more.
The Fed is trying to tame inflation by calming the economy, but as it continues to raise interest rates, the risks increase that this country will be tempted into a sharp deflation with massive job losses.
Thursday’s GDP report is likely to encourage the Federal Reserve to go ahead with a 0.75 point rate hike at its meeting next week.
Fed officials will also closely monitor personal consumption expenditures price data for September and labor cost figures for the third quarter, both of which are due on Friday.
The latest GDP report showed that strong exports and steady consumer spending, supported by a healthy job market, helped restore growth to the US economy.
Consumer spending, which accounts for about 70 percent of US economic activity, expanded at an annual pace of 1.4 percent, down from a rate of 2 percent from April through June. The latest quarter’s growth also got a boost from exports, which jumped at an annual pace of 14.4 percent.
Despite this, housing investment fell at an annual pace of 26 percent, hurt by rising mortgage rates as the Federal Reserve raised borrowing costs to combat chronic inflation.
The rally in the third quarter was mostly due to a recovery in the same technical factors that drove the first-half decline, including private inventories and the trade balance.
Gas prices have fallen from June highs of over $5 a gallon, to a national average of $3.79 earlier this week.
The overall economic outlook is bleak. The Fed has raised interest rates five times this year and is set to do so again next week and into December.
Federal Reserve Chairman Jerome Powell warned that Fed increases will bring “pain” in the form of higher unemployment and possibly a recession.
The government’s latest GDP report comes as Americans, concerned about inflation and the threat of a recession, begin voting in the midterm elections that will determine whether Biden’s Democratic Party retains control of Congress.
Inflation has become a signature issue for Republican attacks on Democrats’ management of the economy.
Headline inflation remains stubbornly high at 8.2 percent, and core inflation, which excludes volatile food and energy prices, hit a four-decade high of 6.6 percent in September.
With inflation soaring, the steady rise in prices has been stressing families across the country. At the same time, rising interest rates have derailed the housing market and will likely inflict broader damage over time.
The global economic outlook, too, is getting bleaker the longer Russia’s war against Ukraine drags on.
The “second” estimate of GDP for the third quarter, based on more complete data, will be released on November 30.
