The economy supposedly shrank in the first six months of 2022 and sparked a fierce debate in Washington over whether the U.S. had sunk into recession. But even if it did, the economy is primed to grow again in the third quarter.
The early signs point to resumed economic expansion in the period running from July to September: Rising retail sales and consumer spending. Steady growth among manufacturers and service-providing companies. Increasing inventories. And a contracting trade deficit.
GDP is the official scorecard of sorts for the economy. The Atlanta Federal Reserve’s GDPNow forecasts a 1.4% annual increase in gross domestic product in the third quarter. S&P Global, formerly Macroeconomics Advisors, pegs the gain at 0.9%.
Some Wall Street forecasters are more bullish.
Amherst Pierpont Securities, for instance, estimates a 3.7% increase in GDP in the third quarter. And Capital Economics forecasts a 3% advance.
A lot could change, of course, over the next month as August and September data pour in. Yet a slew of indicators such as restaurant reservations. hotel stays and air travel suggest Americans are going out a lot and still spending plenty of money.
Two factors particularly stand out. The U.S. trade deficit has contracted sharply since hitting a record high early in the year. And businesses are increasing inventories at a faster pace.
The record trade gap largely explains why GDP declined at a 1.6% annual rate in the first quarter. Had the trade gap been unchanged, the U.S. would have showed positive growth.
A massive slowdown in warehouse restocking, similarly, triggered the 0.9% decline in second-quarter GDP.
Two quarters in a row of negative GDP meets the old rule of thumb for when an economy is in recession, but the group that makes official declaration in the U.S. takes a broader view. So far it’s refrained from declaring a recession.
In any event, rising inventory and a falling trade gap are primed to act as a tailwind in the third quarter after being a big drag in the first and second quarters.
Yet even if GDP resumes expansion again in the third quarter, the U.S. economy is still in a precarious position.
How so? The Federal Reserve is sharply raising a key short-term U.S. interest rate to try to douse high inflation, a strategy that typically weakens the economy. If rates rise high enough, many economists say, the U.S. could tip into a recession.
What’s the tipping point? A short-term rate of 4%, some say.
The central bank’s so-called fed funds rate now stands at 2.25% to 2.5%, but the Fed is likely to raise it again this month to a top range of as high as 3%.
“We have a mild recession penciled in right now,” said chief economist Eugenio Aleman of Raymond James. “If the Fed goes further than that, the recession might be deeper.”
