Offsetting the First Half Decline; US NOT In Recession

Real GDP rose at a 2.6% annual rate last quarter, slightly more than offsetting the decline in the first half of the year. As we have repeatedly said, this clearly shows that the U.S. economy is not in recession in 2022. Indeed, payroll jobs rose by 3.77 million in the first three quarters of this year and the unemployment rate was 3.5% in September, down from 3.9% in December 2021.

The GDP inflation rate slowed to a still too high 4.1% annual rate in the third quarter, but less than half the 8.6% annual pace in the first half of this year. The Fed’s preferred measure of consumer price inflation, the PCE price index, rose at a 4.2% annual rate in the third quarter, down from a 7.4% annual rate in the first half of the year, mostly due to lower gasoline prices. The core (ex-food and energy) PCE price index slowed to a 4.5% annual rate last quarter, down from a 5.1% annual pace in the first half of this year. The third quarter 2022 total and core PCE inflation rate was 6.3% and 4.9%, respectively, compared to the same quarter a year earlier (i.e., the year-over-year percent change watched closely by the Fed). Both measures were down slight from the Y/Y % change ending in the second quarter, which is why we think the inflation rate peaked in the second quarter. Having said that, inflation is still much too high and is still well above the Fed’s 2% target. In response, we expect the FOMC will hike the Fed funds rate by 75 bps to a 3.75-4.00% target range at their November 2 meeting, followed by a 50 bps funds rate hike at their December 16 meeting.

The 2.6% real GDP annual growth last quarter was driven by a modest 1.4% annual rise in real consumer spending, a strong rise in business equipment investment and global exports, and a moderate 2.4% annual rise in Federal, state, and local government spending. In sharp contrast, residential (housing) investment collapsed at a 26.4% annual rate, showing the housing sector is in a recession in response to greatly reducing home buying affordability (a double whammy of higher mortgage rates and home prices). Also, less inventory building reduced real GDP growth last quarter by 0.7 percentage points.

Drilling into the GDP report to focus on spending by U.S. consumers, business, and governments (so-called “final sales to domestic purchasers”), that spending rose at only a 0.5% annual rate in the third quarter, which is not much different than its 0.7% annual pace in the first half of this year. Thus, while the U.S. economy has NOT been in a recession thus far this year, its growth rate has been well below its roughly 2% potential growth rate, which makes the U.S. economy very vulnerable to falling into a recession in 2023.