Examining Third-Quarter GDP Results

This article is provided by ITR Economics in partnership with IMEC.

Third-Quarter Results

US Real Gross Domestic Product (GDP) expanded 0.64% from the second to the third quarter, returning to record levels following contraction in the first and second quarters. Growth was driven in large part by Personal Consumption Expenditures on Services and was supported by rising government spending, a shrinking trade deficit, and an increase in nonresidential fixed investment (equipment, intellectual property). Results for residential fixed investment, nonresidential fixed investment in structures, private inventory investment, and consumer spending on goods decreased in the third quarter.

The ITR Outlook

We anticipate US Real GDP will trend relatively flat in the coming quarters. This expectation is predicated on solid consumer and business finances. Consumers have weathered high inflation and are bending but not broken, as evidenced by third-quarter Personal Consumption Expenditures. In addition, Real (inflation-adjusted) Total Personal Income Excluding Transfer Payments is rising.

On the business front, US Corporate Profits are at record highs, and US Business Applications remain well above the pre-pandemic level. These trends point to confidence in long-term stability and growth prospects for the US economy. In addition, a shift toward nearshoring as businesses look to simplify supply chains will be a tailwind for growth.

Risks to Growth

From an energy crisis in Europe to war in Ukraine to property development troubles in China, global risks to the US economy are varied. Domestic risks exist as well. The pace at which the Federal Reserve has raised its benchmark federal funds rate is the fastest since the 1980s. This rapid pace of interest rate rise poses a risk to growth across the macroeconomy as borrowing costs rise and higher rates put downward pressure on macroeconomic demand. The 10-year to 3-month Treasury yield curve has inverted in recent weeks. Our analysis suggests that a sustained inversion in this yield curve – more than two months below the zero line – can be a leading indicator to recession in the US economy, though the lead time is variable. We continue to monitor this and other risks carefully. However, avoid being overly pessimistic. Keep in mind that the US economy has significant size and momentum, and it takes considerable force to throw growth off track.