Q3 Growth Weaker than Headline Suggests
October 28, 2022
Inflation-adjusted growth in the US economy turned positive in the third quarter. The 2.6 percent annualized growth in the period was slightly faster than expected and a welcomed return to growth after two quarters of contraction. However, the pace of headline growth significantly overstates the underlying growth rate in the economy.
Source: Bureau of Economic Analysis
As you can see above, international trade accounted for an abnormally large portion of overall growth. The category made a 2.77 percentage point positive contribution, more than twice its contribution in the second quarter. Exports increased 14.4 percent as shipments of petroleum products increased. The US also saw more inbound international tourists and international utilization of financial services, which count towards exports in the GDP accounting. Meanwhile, imports fell 6.9 percent, mainly reflecting a decline in consumer goods imports and fewer Americans traveling abroad. However, it is doubtful that international trade will continue to contribute to growth at the same pace. The US dollar appreciation and the global growth slowdown suggest that US exports will be weaker in the upcoming quarters.
The contributions of other categories were much smaller. Annualized personal consumption growth slowed to 1.4 percent from 2.0 percent in the second quarter. Amid this weaker growth, consumption continued to shift towards services and away from goods. Goods spending has now contracted for three consecutive quarters. Elsewhere, fixed investment was a net negative in the period. Investments in equipment and intellectual property products pushed nonresidential investment growth to an annualized 3.7 percent. However, the increase in mortgage rates has curtailed both new home construction and broker fees, leading to an astounding 26.4 percent annualized decline in residential investment.
Our preferred method of sifting through the individual categories to find the underlying trend in economic growth is looking at a subset of GDP call Final Sales to Private Domestic Purchasers. This subset removes the more volatile categories of growth (international trade, government spending, and private inventories) but leaves personal consumption and fixed investment, which account for roughly 90 percent of the overall economy. Annualized growth in this subset declined for the third straight quarter to 0.1 percent.
Source: Bureau of Economic Analysis
This is to be expected, given the increase in interest rates this year. Moreover, this weakness will likely continue over the next few quarters as the Federal Reserve continues to increase rates and fights inflation.
David Allen CFA, CFP
Chief Investment Officer
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