U.S. Economy Grew 2.6% in Third Quarter, GDP Report Shows

The U.S. economy grew in the third quarter but showed signs of a sharp slowdown as consumer and business spending slumped amid high inflation and rising interest rates.

Gross domestic product—a measure of goods and services produced across the nation—grew at an annual rate of 2.6% in the third quarter after declining in the first half of the year, the Commerce Department said Thursday.

Trade contributed most to the third-quarter change as the United States exported more oil and natural gas and Ukraine’s war disrupted supplies to Europe. Consumer spending, the main engine of the economy, grew but at a slower pace than in the previous quarter.

Businesses reduced spending on buildings, however, and residential investment fell at an annual rate of 26.4%, the department said.

Stocks were mixed after the GDP release and earnings announcement. Treasury yields fell.

Economic uncertainty is growing and many economists are worried about the possibility of a recession in the next 12 months. The Federal Reserve’s efforts to combat high inflation by raising interest rates are expected to further weigh on the economy.

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“The overall state of the economy is deteriorating and a lot of it is just the weight of high inflation and higher interest rates,” said Richard F. Moody, chief economist at Regions Financial. corp.

“I don’t think we have seen all the effects of the higher employment rates in the economy, so that’s why we have very low expectations for the next quarters.”

Contribution to Growth

Net exports and a narrowing trade deficit drove third-quarter growth, while consumers contributed less than the previous quarter.

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The US is not the only part of the world facing economic challenges. The European Central Bank on Thursday raised its key interest rate to 1.5% from 0.75% as it also tries to tame inflation in a region teetering near recession.

One of the sectors most sensitive to interest rates—housing—is showing signs of pain. Home sales posted their longest streak of decline in 15 years and the average rate on a 30-year fixed-rate mortgage eclipsed 7% Thursday for the first time in more than 20 years.

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Economists do not expect the increase in the third quarter of exports to endure, giving a stronger dollar and weakening the world economy. Many point to final sales to private domestic buyers, a measure of consumer and business spending that measures underlying demand in the economy, as a sign of a broader economic slowdown. That increased at an annual rate of 0.1% in the third quarter after rising 0.5% in the second quarter and increasing 2.1% in the first quarter.

Some of this year’s economic slowdown reflects a return to a more normal growth rate after the economy expanded last year at an unusual pace of 5.7% as it rebounded from earlier pandemic disruptions.

The trajectory of the economy depends largely on how consumers behave in the coming months.

High inflation and rising interest rates have done little to undermine the health of the American consumer, Bank of America Corp. Chief Executive Brian Moynihan said in a recent earnings call. The company’s data shows consumers continue to spend more. They also have more money in the bank than before the pandemic.

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Consumers benefit from a tight labor market. Employers are holding on to the workers they have, with jobless claims remaining low last week. Many businesses are also raising wages as they struggle with staff shortages.

Mark Begor, CEO of credit reporting company Equifax, said: “Wage growth is picking up, which is good for consumers, and it helps their balance sheet. Inc.

on an earnings call this month. “Obviously, inflation is a bad guy, and it hurts a lot of consumers. But even with inflation, consumers are still out there spending and traveling and doing all the things that they do in their lives.”

Still, consumers might start to crack. Kathy Bostjancic, chief US economist at Oxford Economics, said many people are taking advantage of the pandemic economy and are turning more to credit cards to finance their spending.

The consumer sentiment index and the consumer confidence index both attempt to measure the same thing: consumer sentiment. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

But with higher interest rates, “there’s really a limit to how much money consumers can count on their credit cards,” he said.

Some companies—particularly in sectors that benefited from an early glut in the pandemic—are seeing a pullback from consumers. Gary Lemanski, owner of Grawn, Michigan-based company that manufactures and sells accessories for hunting, shooting and outdoor recreation.

Many of the factors that have spurred a sales surge in 2020 and 2021—such as consumers’ extra cash from government stimulus, their time at home to go to the woods and their lack of ability to spend money on services including travel— has lost color. , he said.

Inflation is causing many consumers to cut back on discretionary purchases, including the products Altus sells, such as electronic ear tapes for hearing protection that can go for $200 to $250, Mr. Lemanski said.

“I talk to a lot of people, and you just hear it over and over again: It’s harder to make ends meet,” he said.

Many tech companies are feeling the effects of a slowing economy. Facebook parent Meta Platform Inc.

posted its second revenue decline in a row, as the social media company struggles with tough macroeconomic conditions that are weighing on advertising spending. Microsoft corp.

said he expects a sharp decline in personal-computer sales and the strength of the dollar continues to weigh on growth.

A series of interest rate hikes have rippled through the US economy, with more expected on the way. WSJ breaks down the numbers hitting America’s stock market this year and beyond. Photo: Elise Amendola/Associated Press

Inflation is discouraging some consumers from making big-ticket purchases. Most Americans say it’s a bad time to buy a car or major household goods such as furniture, refrigerators or stoves, with a large portion attributing their opinion to high prices, University of Michigan survey data shows.

CarMax Inc.,

a used car retailer, reported a profit drop of more than 50% in its most recent quarter as tough economic conditions weighed on consumers.

“This loss reflects widespread pressures facing the used car industry,” said William Nash, the company’s chief executive, in an earnings call. Higher prices, climbing interest rates and low consumer confidence “have all led to a decline in the used-car sales market,” he said.

Write to Sarah Chaney Cambon at [email protected]

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