Trade seen boosting U.S. economy in Q3; growth details likely soft
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[October 27, 2022] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. economic growth
likely rebounded in the third quarter, driven by a shrinking trade
deficit, but that would grossly exaggerate the economy's health as the
Federal Reserve's aggressive interest rate increases dampen demand.
The Commerce Department's advance third-quarter gross domestic product
on Thursday is expected to show underlying demand in the economy flat
last quarter amid a slowdown in consumer spending and moderate growth in
business investment.
Still, the anticipated rebound in growth after two straight quarterly
declines in GDP would be further evidence that the economy was not in a
recession, though the risks of a downturn have increased as the Fed
doubles down on rate hikes to battle the fastest-rising inflation in 40
years.
"The devil is in the details, and if you strip out trade, GDP will look
a lot weaker than the headline number suggests," said Ryan Sweet, a
senior economist at Moody's Analytics in West Chester, Pennsylvania. "We
don't have a recession in our baseline, but the risks are increasing;
we're going to need a little bit of luck."
According to a Reuters survey of economists, GDP growth likely rebounded
at a 2.4% annualized rate last quarter after contracting at a 0.6% pace
in the second quarter. Estimates ranged from as low as a 0.8% rate to as
high as a 3.7% pace.
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The trade deficit appears to have narrowed sharply in part as slowing
demand curbed the import bill. Exports also increased for much of last
quarter. Economists estimate that the smaller trade gap added as much as
3.0 percentage points to GDP growth.
The data will have little impact on monetary policy, with Fed officials
watching September personal consumption expenditures price data and
third quarter labor cost numbers due on Friday, ahead of their Nov. 1-2
policy meeting.
The U.S. central bank has raised its benchmark overnight interest rate
from near zero in March to the current range of 3.00% to 3.25%, the
swiftest pace of policy tightening in a generation or more. That rate is
likely to end the year in the mid-4% range, based on the Fed officials'
own projections and recent comments.
Wild swings in trade and inventories were behind the contraction in GDP
in the first half of the year.
SLOWER CONSUMER SPENDING
Growth in consumer spending, which accounts for more than two-thirds of
U.S. economic activity, is expected to have slowed to about a 1.0% rate
from the April-June quarter's 2.0% pace.
Consumer spending is being supported by a strong labor market, which is
driving up wages. The Labor Department is expected to report on Thursday
a modest increase in the number of people filing new claims for
unemployment benefits last week, according to a Reuters survey.
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A cargo ship is seen near the port of
Oakland in Oakland, California, U.S., July 22, 2022. REUTERS/Carlos
Barria/File Photo
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Initial claims for unemployment benefits have remained significantly
low despite reports of companies, mostly in the interest
rate-sensitive sectors of the economy, laying off workers. A modest
rebound in business spending on equipment is predicted after it
contracted in the second quarter.
With consumer spending softening and import growth slowing,
inventories are a wild card. Some economists believe inventories,
which were the biggest drag on GDP in the second quarter, had a
neutral impact on output last quarter. Others still expect them to
have remained a burden on growth.
Final sales to private domestic purchasers, which exclude trade,
inventories and government spending, are expected to have been flat,
a sign that higher borrowing costs are starting to slow demand. This
measure of domestic demand increased at a 0.5% rate in the second
quarter.
Investment in the housing market, which has been hardest hit by
higher borrowing costs, is expected to have dropped for the sixth
straight quarter. A rebound is expected in government spending after
five consecutive quarters of decline.
"We are starting to see the impacts of tightening come through on
the demand side in the housing sector, which in turn should suggest
that the Fed will eventually see some of that slowing in
inflationary pressures," said Rhea Thomas, a senior economist at
Wilmington Trust in Philadelphia.
While the pace of inventory accumulation has slowed in recent
months, economists worry that a rising stockpile of unsold goods
could trigger a recession. Retailers are finding themselves saddled
with excess merchandise, because of easing supply chain bottlenecks
and ebbing demand for goods, forcing them to offer discounts, which
economists say may not be enough.
Business inventories increased at a rate of $110.2 billion in the
second quarter, with economists expecting more or less a similar
pace of accumulation last quarter. Inventory runoffs have been
responsible for a number of recessions.
"Inventory runoffs do not get a whole lot of attention, but that's
where I think the weak spot is," said Sung Won Sohn, a finance and
economics professor at Loyola Marymount University in Los Angeles.
"If inventory runs off, production declines, that hurts employment
and therefore spending. It happened a number of times in the postwar
period, and I think that is what is happening right now."
(Reporting by Lucia Mutikani; editing by Jonathan Oatis)
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