Volatile net trade propels US Q3 Real GDP to 2.6%; Recession threat looms large

on Oct 27, 2022
  • US real GDP turned positive after two consecutive quarters of negative growth.
  • Consumer spending was positive but eased from a month ago.
  • House prices dragged down overall GDP.

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In its advance GDP estimate released earlier today, the US Bureau of Economic Analysis announced that the real GDP for Q3 grew at 2.6% adjusted for inflation, on an annualized basis. This was a dramatic turnaround, given that the past two quarters registered negative growth.

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Quarter on quarter, Q3 GDP grew by 0.6%.

In both Q1 and Q2, volatility in net trade and inventory stocks weighed on economic activity.

However, in Q3, inventory positions eased due to better business management, while net trade expanded with demand for US-made goods increasing overseas.

An important component of this was likely the sanctions on major exporters such as Russia.

As net trade is a volatile component, it often swings widely from quarter to quarter and reveals little about the state of the economy. As a result, its strongly positive contribution to GDP does not mean that the US economy is out of the woods.

Source: BEA

From the below graph, it is clear that net trade grew in the third quarter, the primary driver of growth. Other important drivers were positive consumer spending albeit slowing, and government expenditure.

Source: ING, Macrobond

Consumer spending, considered the core of the US economy, rose by 0.4% in Q3, but eased from 0.5% in the previous quarter, as inflation continued to hurt household budgets.

A significant drag on Q3 GDP was due to the decline in housing sector prices and falling demand amid surging mortgage rates.

The sector contracted 7.4% in Q3.  ING economists note that this amounted to a negative 1.4% contribution to real GDP.

For Q3, the current dollar GDP increased 6.7% Y-o-Y.

Recessionary fears

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Despite the return to positive growth, recession fears dominate investor sentiment.

The net trade position which powered growth in Q3 is not expected to sustain in the long run given the strength of the dollar, and the deterioration of demand conditions in both Europe and China.

Europe is reeling under an energy crisis, whereas China is still shackled by stringent covid measures.

Moreover, the Fed has raised rates by 300 bps in a few short months (Feel free to check out my article on the topic at Invezz), at three times the pace of conventional monetary tightening.

The cumulative effects of higher borrowing costs are beginning to play out in the economy, forcing weaker demand, and will continue to do so into the future.

In response to the ongoing monetary tightening, consumer spending and personal consumption have been discouraged, while inverting yield curves signal an oncoming recession.

Last week, briefly but incredibly, the 3-month bill inverted with the 10-year. This may be implying that the next recession will be very severe indeed.

However, as alarming as this situation is, this slowdown is just what the Fed is looking for in its effort to rein in inflation.

Michael Gapen, the chief U.S. economist for Bank of America, warned,

Ignore the headline number — growth rates are slowing…It wouldn’t take much further slowing from here to tip the economy into a recession.


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Although the positive GDP figure is a welcome change, it will have very little impact on the Fed’s meeting scheduled for next week.

Policymakers will be more interested in tomorrow’s Personal Consumption Expenditure Price Index data, although with the CME FedWatch Tool reflecting a 91.4% probability of a 75 bps hike, little will alter Jerome Powell’s stated trajectory.

Goldman Sachs has forecast a 35% chance of a recession in the next 12 months.

On the political front, today’s positive figure will give the Democratic party a boost ahead of the November 8 mid-terms.

In other news, durable goods rose 0.4% during September, rising less than anticipated but higher than the 0.2% in the previous month.


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