Credit Sesame discusses U.S. economy news, economic growth, inflation and the trade deficit.
Talk about a supply chain problem. Few things have been in shorter supply this year than good economic news. However, the initial report on U.S. Gross Domestic Product (GDP) during the third quarter of 2022 contained a triple dose of good news.
US economy news for the third quarter of 2022
On October 27, the Bureau of Economic Analysis (BEA) released its advance estimate of economic activity during the third quarter. The report showed positive signs in the form of a growing economy, slowing inflation and a shrinking trade deficit.
Coming under a week before the November Federal Open Market Committee meeting, this report raised the question of whether the Fed has been successful in its mission to cool inflation without killing economic growth.
It’s too early to draw that decisive a conclusion. For now though, the third quarter GDP report was a step in the right direction. Coming in a year that’s been full of economic missteps, that’s certainly good news.
Economic growth came back in the third quarter
The report showed that GDP grew at a real annual rate of 2.6% in the third quarter. In economic terms, the word “real” means after adjustment for inflation.
That inflation adjustment is especially significant at a time when inflation has been high. While spending has been driven by rising prices, the economy managed to grow at a faster rate than those price increases.
The third quarter’s solid growth rate is especially welcome after the GDP had declined in each of the year’s first two quarters. Some commentators prematurely labeled those declines as proof that the economy had entered a recession, but the slippage in economic activity was too slight to be officially considered a recession.
Now, with a return to growth in the third quarter, it appears the economic expansion still has some life left in it. Since the third quarter’s growth exceeded the declines of the first half of the year, economic growth is now a net positive so far in 2022.
Inflation eased a little
On top of a solid growth rate in the third quarter, the report’s added bonus was that it showed a slower rate of inflation for the quarter.
In conjunction with its economic reports, the BEA uses a measure of inflation called the Personal Consumption Expenditures Price Index (PCE).
The PCE differs from the more widely-known Consumer Price Index (CPI) in a number of ways. Two prominent differences are as follows:
- The CPI measures things bought directly by consumers, while the PCE also includes things purchased on behalf of consumers, such as employer-sponsored health insurance
- The PCE attempts to account for substitution, which is the real-world response of consumers changing what they buy according to the prices of different goods and services
Both the CPI and the PCE have their merits. What makes the PCE especially significant is that it is the Fed’s preferred measure of inflation.
This measure of inflation grew at an annual rate of 4.2% during the third quarter. While that’s still more than twice the Fed’s official inflation target of 2.0%, it is an improvement after annual inflation rates of 7.5% in the first quarter and 7.3% in the second quarter.
The 4.2% inflation rate in the third quarter was the most moderate inflation rate since the fourth quarter of 2020.
The trade deficit narrowed
One additional bright spot in the GDP report was that the trade deficit declined in the third quarter.
U.S. exports of both goods and services increased during the quarter. This was achieved despite a strong U.S. dollar, which makes American goods more expensive to foreign buyers.
Meanwhile, imports declined during the third quarter. Imports are considered a subtraction from GDP, because they represent U.S. spending going towards foreign rather than domestic companies.
Has the Fed engineered a soft landing?
The combination of stronger growth and weaker inflation seems like an ideal outcome to the year’s dominant economic problem.
The Fed has been raising interest rates in an attempt to cool down inflation by reducing consumer demand. However, it has taken a step-by-step approach to those interest rate increases out of fear that too sharp a decline in demand would trigger a recession.
The ideal case is that the Fed’s policy results in what’s referred to as a soft landing. This is where the economy slows enough to calm inflation without tipping over into recession.
Does the combination of rising growth and slowing inflation in the third quarter mean the Fed has accomplished this?
It’s way too early to tell. Here are two reasons why:
This GDP report was an advance estimate
The BEA issues three reports on GDP each quarter. It issues an advance estimate roughly a month after the end of the quarter. Then, as more data becomes available, it issues two subsequent reports with increasingly accurate figures.
The October 27 report was the first of those three reports for the third quarter. Historically, advance estimates of GDP growth differ from the final versions by an average of 0.6%. That difference can go in either direction.
At this point, it’s fair to say that GDP growth was almost certainly positive in the third quarter. However, it’s not yet certain that it is quite as good as the advance report indicates. Then again, it might turn out to be even better.
Energy prices may become a problem again
One thing that helped inflation numbers ease in the third quarter was a decline in energy costs.
That trend now looks like it has reversed. Oil prices have started rising since a group of oil-producing countries agreed at an October 5 meeting to cut production in response to sagging prices. That could make energy an inflationary factor in the fourth quarter.
The Fed was accused of being slow to respond when inflation started to rise last year. It seems unlikely that they will declare victory over inflation on the strength of one encouraging quarter.
We can expect the Fed to continue raising interest rates until there is sustained evidence that inflation has settled down. Still, at least the third quarter report is encouraging enough that the Fed should not need to accelerate its interest rate increases.
You may also be interested in:
- Balancing the Inflation-Recession Tightrope with Interest Rates
- How Inflation Affects All Parts of Life
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.