WASHINGTON (AP) — Despite high interest rates and chronic inflation, the U.S. economy grew at an annual rate of 2.9 percent between July and September, the government said Wednesday, a healthy upgrade from its original estimate.
The latest quarter’s rise in US gross domestic product – the total output of goods and services in the economy – followed two straight quarters of contraction. This decline in output raised fears that the economy might slip into recession in the first half of the year, despite a still strong labor market and stable consumption.
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Since then, however, most signs point to a resilient but sluggish economy led by steady hiring, high vacancies and low unemployment. A government report on Wednesday showed that the recovery in growth in the July-September period was driven by strong gains in exports and consumer spending, which was stronger than initially reported.
“Despite higher borrowing costs and prices, household spending – the driver of the economy – appears to be holding up, which is a positive development for the near-term outlook,” said Rubeela Farooqi, chief US economist at High Frequency Economics.
It was the second of three estimates the Commerce Department will provide on economic growth in the third quarter. In the initial assessment, the ministry estimated that the economy grew at an annual rate of 2.6% in the last quarter.
Economists expect the economy to post a modest 1 percent annual growth from October to December, according to a survey of forecasters by the Federal Reserve Bank of Philadelphia. The country’s manufacturing sector is slowing despite the unwinding of supply chains that have lagged since the economy began to recover from a pandemic recession two years ago. Inflation threatens to dampen the key holiday shopping period. Retailers say inflation-weary shoppers are shopping cautiously, with many waiting for the most attractive bargains.
But a recession is widely expected, if likely mild, in 2023 as the Federal Reserve pushes to tame the worst burst of inflation in four decades by raising interest rates aggressively. The Fed has raised its benchmark short-term interest rate six times this year — including four consecutive sharp hikes of three-quarters of a percentage point. The central bank is expected to announce an additional increase in the key interest rate by half a point at its next meeting in mid-December.
As the Fed’s benchmark interest rate affects many consumer and business loans, the series of hikes has made most loans across the economy significantly more expensive. This is especially true for mortgage interest rates, which have proven devastating for the US housing market. As mortgage interest rates doubled over the past year, housing investment fell by an annualized 26.8% in the July-September period, according to Wednesday’s GDP report.
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Chairman Jerome Powell stressed that the Fed will do whatever it takes to contain the jump in cost of living, which rose 7.7% in October from a year earlier – a slowdown from the 9.1% year-over-year peak June value. still well above the Fed’s 2% target.
Economists rejected the GDP contraction in the first half of the year because it did not reflect a larger fundamental weakness of the economy. Instead, it was mainly caused by an inflow of imports and reductions in corporate inventories.
Meanwhile, the labor market has remained surprisingly resilient. Employers added a healthy average of 407,000 jobs per month through 2022. But economists predict the country gained an additional 200,000 jobs this month, according to a survey by data firm FactSet. The government will publish the November employment report on Friday.