US economy rebounds as businesses and consumers show resilience

The US economy rebounded following two quarterly contractions thanks in part to resilient consumers and businesses, though inflation and higher interest rates leave growth vulnerable in the coming months.

Gross domestic product rose at a 2.6 per cent annualised rate in the July to September period after falling for the first two quarters, the Commerce Department’s preliminary estimate showed on Thursday. Personal consumption, the biggest part of the economy, climbed at 1.4 per cent, better than forecast but still a slowdown from the prior quarter.

The median projection in a Bloomberg survey of economists called for a 2.4 per cent rise in GDP and a 1 per cent advance in personal consumption.

That said, a key gauge of underlying demand that strips out the trade and inventories components — inflation-adjusted final sales to domestic purchasers — rose 0.5 per cent in the third quarter, one of the slowest since the start of the pandemic.

While the details of the report showed firm business investment and continued consumer spending on services, the biggest contributor to GDP was the volatile net exports category. Government spending also rose firmly, but the housing sector was a significant drag on growth.

Though the quarterly expansion may help alleviate concerns that the US is already in a recession, the economy’s main engine — consumer spending — remains under pressure from the highest inflation in a generation. A strong labour market and savings amassed over the course of the pandemic have so far provided Americans the wherewithal to keep spending. It’s unclear how long households can hold up as the Federal Reserve’s efforts to tame inflation pose headwinds to growth.

In the near-term, it’s driven up mortgage rates to the highest in two decades, causing a rapid deterioration of the housing market.

And in the coming year, many economists expect the central bank’s actions to ultimately push the economy into recession.

“A return to economic growth in the third quarter obscures continued signs of a slowdown in components that provide a cleaner signal of momentum… The Fed is likely to view the weaker components as intended consequences of its tighter monetary policy, and not as reasons to back off the tightening cycle just yet.”– Andrew Husby and Eliza Winger, economists.

The personal consumption expenditures price index, an inflation measure followed by Fed officials, grew an annualized 4.2% in the third quarter, the slowest pace since the end of 2020. Stripping out food and energy, the index rose 4.5%. September data will be released Friday.

The S&P 500 index opened higher while short-term Treasury yields dropped.

Fed Chair Jerome Powell has said the central bank believes the US will need both a period of below trend growth and some softening in labor market conditions to reach its inflation goal. While policymakers hope to avoid a recession, the Fed’s latest forecasts have the economy growing just 0.2% in 2022 and 1.2% in 2023.