The American economy grew in the third quarter, but there are signs that its growth is beginning to slow.
U.S. gross domestic product (GDP) came in Wednesday at a revised 5.2 percent increase in the third quarter, higher than the 4.9 percent pop of the initial estimate, to hit the fastest quarterly rate of growth in almost two years.
Corporate profits increased by $105.7 billion in the third quarter, compared to $6.9 billion in the second, the Commerce Department reported Wednesday.
What that 5.2 percent GDP number means
The latest GDP number is the highest since the fourth quarter of 2021, when it hit 7 percent and the economy was still seeing explosive quarterly growth in the recovery from pandemic shutdowns.
Despite consecutive quarters of negative growth in the first half of 2022, a strong job market and consumer spending pushed the economy out of recession range.
A major contraction predicted by many following the booming recovery has yet to materialize, adding to the likelihood that the economy could achieve a “soft landing” on a path to more regular growth.
Consumer spending continues to heat up
Personal consumption expenditures increased 3.6 percent in the third quarter, up from 0.8 percent in the second quarter, with advances in both goods and services spending.
Spending was up notably in recreational goods and vehicles and in recreational services, such as concerts and movies.
“The increase in real GDP reflected increases in consumer spending [and] private inventory investment,” the Commerce Department noted.
Corporate profits come in for rough criticism
Earlier this week, President Biden called out the role of private-sector profit-gouging in inflation.
“Let me be clear,” he said Monday. “To any corporation that has not brought their prices back down, even as inflation has come down, even supply chains have been rebuilt — it’s time to stop the price gouging, [give] the American consumer a break.”
Upward revisions to fixed capital investments and state and local government spending drove the higher GDP number, while robust consumer spending was marked down slightly in the third quarter to a 3.6-percent increase.
“Economic growth was even better than expected in the third quarter, with real GDP rising 5.2 percent versus the advance estimate of 4.9 percent. The additional boost came from 2 sources: investments and government spending,” Sonu Varghese, a strategist at Carson Group, said in an analysis.
Gross domestic income (GDI), an inverse measure of economic productivity, came in at a more modest 1.5 percent. The average of real GDP and real GDI advanced 3.3 percent in the third quarter, up from 1.3 percent in the second.
Profits fly high while consumers face prices
While companies rake in massive profits, consumers are being hammered by prices that are as much as 20 percent higher than they were before the pandemic.
“Pandemic-era supply chain disruptions enabled corporations to hike prices and juice profit margins to highs not seen in more than 60 years,” Kitty Richards, director of Groundwork Collaborative, an economic research and advocacy group, wrote in an analysis.
“Now supply chains have returned to normal, but corporations in many sectors are still charging inflated prices and extracting exorbitant profit margins,” Richards said.
Corporate profits are now at the highest share of national income in more than 10 years.
“This means the labor share remains flat or declining, depending on the measure you use, in the third quarter. There’s still room to grow back to more historical ranges during this recovery,” Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, another research and advocacy organization, wrote.
“[It’s] good reason for the President to be flagging corporate profits alongside high prices,” he added.
Sixty percent of Americans say their income hasn’t kept pace with increases in daily expenses over the past year, according to research released Wednesday by market data company Bankrate. That’s up from 55 percent last year.
“Twenty-nine percent say their pay has kept up, compared to 33 percent last year. Older workers, lower income earners, and hourly workers are more likely to say their pay has not kept up with inflation,” the Bankrate analysis found.
The recession that won’t materialize
The latest GDP numbers come after a deluge of recession predictions from market commentators, economists and even authorities like the Federal Reserve, which forecast a “mild recession” earlier this year before scrapping that call at a later meeting.
“A US recession is effectively certain in the next 12 months,” economists with Bloomberg Economics wrote in October 2022.
The company’s recession probability model “forecast a higher recession probability across all timeframes, with the 12-month estimate of a downturn by October 2023 hitting 100 percent.”
Harvard University economist Larry Summers said last year that unemployment would need to skyrocket in order to tame inflation before eventually conceding that “transitory factors” contributing to inflation were easing.
Robust consumer spending, a red hot job market, knock-on effects from $1 trillion in pandemic stimulus, as well as longer-term investments spurred by big pieces of legislation have likely all been working in the opposite direction from a downturn, to varying degrees.
Inflation is coming down but pre-pandemic prices are likely gone forever
The pace of price increases in the economy has come down over the past year, and in a few sectors, such as durable goods, price levels have deflated. Annual price increases topped out at 9 percent last June and are now at 3.2 percent, according to the Labor Department’s consumer price index (CPI).
But price levels in absolute terms are still way higher than they were before the pandemic and have little chance of returning to their pre-pandemic norms.
An analysis released this week by Bloomberg Economics found that prices are an average of 20 percent higher across the economy than they were in January 2020.
Rent is up 20 percent, groceries are up 25 percent, electricity is up 25 percent, car insurance is up 33 percent and water is up 16 percent, the analysis found.
Dubbing it a “cost-of-living squeeze,” economists noted that “after accounting for inflation, hourly wages have barely budged since 2020.”
Cost-of-living stresses could be driving poor polling performance
Despite many strong metrics in the national accounting, ranging from consumer spending to the labor market, Americans are disapproving of President Biden’s handling of the economy.
Just 32 percent of respondents said Biden is handling the economy well, according to polling released Tuesday by Gallup.
Slightly stronger marks came in earlier this month from the Harvard CAPS-Harris poll.
That poll found that 44 percent of Americans approved of Biden’s economic stewardship, an increase from 41 percent last month.
White House spokesperson Karine Jean-Pierre echoed Biden’s remarks on the effect of profits and price-gouging on inflation Wednesday.
“Many corporations [have seen] input costs grow more slowly or even fall recently. Some companies are passing those savings on to consumers, but some aren’t,” she said.
“Companies should pass those savings on to consumers by lowering their high markups from the last two years,” Jean-Pierre said. “That’s why taking on price gouging has been part of the President’s economic agenda for more than two years now.”
The market has already priced in rate cuts
Wall Street is already pricing in rate cuts, meaning that the path to more regular growth following the recovery from the pandemic may already be laid out.
This would imply that the soft landing scenario desired by policymakers is already coming to pass.
On Monday, the Wall Street Journal reported that interest-rate futures were at 60-40 odds that “the Fed will lower rates by a quarter-of-a-percentage point by its May 2024 policy meeting.”
That’s up from 29 percent at the end of October, according to CME Group data, the Journal reported.
The U.S. central bank, in its latest summary of economic projections, is still officially predicting one more quarter-point rate hike this year, to max out at a range of 5.5 percent to 5.75 percent.
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