U.S. ECONOMY GREW IN REAL TERMS IN THIRD QUARTER

Adjusted for inflation, the U.S. GDP grew 2.6 percent in this year’s third quarter, after shrinking during the year’s first half.

Consumer spending ticked up 0.4 percent, compared to 0.5 percent in the second quarter. Shoppers reduced their spending on goods. Spending on services increased, but at a slower rate than previously.

Export revenue anchored the expansion as the U.S. exported more oil and refined petroleum products, especially to Europe, as Russia’s war in Ukraine and resulting Western sanctions created shortages in Europe and elsewhere.

International trade is more volatile than domestic spending, leading some analysts to downplay the third quarter’s positive number and predict another contraction this quarter, The New York Times reported.

During the period, growth in consumer spending slowed—and, according to one measure, almost came to a halt—and the housing market contracted the most since the start of the COVID War, both warning signs that a full-blown inflation may lurk in the near future.

Home building and home buying both slumped, shrinking the housing sector by 7.4 percent and peeling 1.4 percent off the growth rate, the NYT said. 

Residential investment sank at a 26.4-percent annual rate and businesses also cut investments in real estate.

“Housing is the single largest trigger to additional spending and it’s not there any more,” chief economist Diane Swonk at KPMG told the NYT. “It’s going in reverse.” 

The U.S. entered a technical recession after the economy shrank during this year’s first two quarters; a technical recession is defined as two consecutive quarters of economic contraction.

“I don’t think we’ve seen the full effects of higher [interest] rates working their way through the economy, so that’s why we have pretty low expectations for the next several quarters,” Richard Moody, Regions Financial Corp.’s chief economist, said to The Wall Street Journal.

However, the jobs market remains strong and layoffs are relatively few. Consumers still have a bit of the cash cushion remaining that they built from savings and stimulus checks during the COVID War.

Whether the country is in a full recession is a judgment left to the National Bureau of Economic Research, a private group of economists, which weighs together a number of factors to make the decision.

“Ignore the headline. Growth rates are slowing,” Michael Gapen, Bank of America’s chief economist, said to the NYT, especially because the strong dollar is making exports more expensive abroad. “It wouldn’t take much further slowing to tip the economy into a recession.”

To keep spending, consumers have been draining their savings, as we reported in “Americans Drain Their Savings to Keep Spending” (12 Oct 2022).

In the third quarter, Americans put just 3.3 percent of their incomes into savings accounts, the smallest portion since 2007.

“‘Borrowed time’ is how I would describe the consumer right now,” Tim Quinlan, a Wells Fargo economist, told the NYT. “Credit card borrowing is up, savings are down, and our costs are rising faster than our paychecks.”

In September, U.S. credit card debt reached $916 billion, the same as in December 2019, credit bureau Equifax reported, up 23 percent from their April 2021 trough.

As the COVID era waned, card issuers promoted spending, lowering standards so people with riskier credit ratings could still qualify for cards.

As a result, the rate of missed payments is rising, but has not yet reached pre-COVID levels, the WSJ said.

TREND FORECAST: At current rates, consumers will spend down their savings to pre-COVID levels and max out their credit cards by mid-year 2023.

Because consumer spending supports as much as 70 percent of the economy, when shoppers stop shopping, a recession becomes inevitable.

The holiday shopping season will be a bellwether: if spending is strong, a recession is more likely to arrive sooner because consumers are getting rid of their dollars faster. If spending is weak, it will be a sign that consumers are growing more cautious and any recession is more likely to be delayed.