US economy rebounds as consumers, businesses show resilience

THE United States 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 (GDP) 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 (Oct 27). Personal consumption, the biggest part of the economy, climbed at a 1.4 per cent pace, 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.

The personal consumption expenditures price index, an inflation measure followed by Fed officials, grew an annualised 4.2 per cent in Q3, the slowest pace since the end of 2020. Stripping out food and energy, the index rose 4.5 per cent. September data will be released on 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 labour 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 per cent in 2022 and 1.2 per cent in 2023. 

The economy did soften in the first half of the year, but part of that weakness reflected drags from volatile categories like net exports and inventories. At the same time, the unemployment rate has retreated to a historic low and layoffs remain scant, challenging the notion that the US is in a recession.

The report likely keeps the Fed on track to raise its benchmark interest rate by 75 basis points next week for a fourth straight meeting. At the same time, policymakers are expected to discuss whether to slow the pace of hikes amid forecasts for inflation to come down next year.

President Joe Biden said on Thursday that a US economic growth rebound in the third quarter was evidence an economic recovery "is continuing to power forward," and said his administration needed to do more to bring prices down for consumers.

"My administration has passed laws that will bring down prescription drug prices and health insurance premiums starting next year. We must do more," Biden said in a statement.

The figures, coming days ahead of mid-term elections, may not be enough to make a difference this close to the vote. High inflation has dragged down Democrats' chances of holding on to their thin congressional majorities.

Gross domestic income, one of the government's main measures of economic activity, will be released with the second estimate of GDP in late November. The National Bureau of Economic Research's Business Cycle Dating Committee, the official arbiter of when business cycles start and end in the US, uses the average of GDP and GDI along with a range of other economic variables to make any recession call.

Residential investment plunged at a 26.4 per cent annual pace, the largest decline since the onset of the pandemic, underscoring how surging mortgage rates have crushed demand for homes. Sales have been falling for months, home prices have started to drop and builder sentiment has plummeted this year.

The report showed trade added 2.77 percentage points to GDP, the largest contribution from that category since 1980. Inventories subtracted from growth.

Inflation-adjusted business investment advanced 3.7 per cent, reflecting a robust increase in outlays for equipment and intellectual property products. At the same time, a separate report on Thursday showed orders for non-defence capital goods, excluding aircraft - a proxy for business investment - dropped 0.7 per cent in September, the most in more than a year.

According to a separate report on Thursday, applications for unemployment benefits held near historically low levels. BLOOMBERG

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