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Economic Report: No recession yet: GDP forecast to grow again in the third quarter. But after that …

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Good news: The U.S. economy grew again in the third quarter after shrinking in the first six months of the year. The bad news? It not going to stop growing talk of recession.

Here’s how to read the third-quarter report on gross domestic product on Thursday morning.

A positive turn

The official scorecard of the economy, GDP, is forecast to expand at a 2.3% annual pace in the period covering July through September, according to Wall Street
DJIA,
+0.88%

analysts.

That would mark a big improvement after GDP contracted at a 0.6% clip in the second quarter and 1.6% in the first quarter. It was the first back-to-back declines since the onset of the pandemic in 2020.

Two quarters of declining GDP meets an old rule of thumb for when an economy is in recession. But the group of noted economists who make the official call use a much broader definition that suggests the U.S. was still in expansion mode.

The biggest reason the U.S. probably wasn’t in recession: Consumers kept spending a lot of money, even after adjusting for inflation.

Consumer spending

The headline GDP number often obscures what is really going on in the economy. And that’s exactly what happened in the first half of the year.

GDP turned negative in the first six months mostly because of a record trade deficit and a smaller inventory buildup among U.S. businesses.

Yet the main driver of the economy, consumer spending, was pretty decent. Spending rose at a inflation-adjusted 1.3% annual pace in the first quarter and an even better 2% in the second quarter.

Simply put, there can’t be a recession when consumers are spending that much money. Household outlays account for 70% of U.S. economic growth.

Consumers may have become more gun-shy in the third quarter, however.

Outlays are forecast to rise at a 1% annual rate , which would mark the smallest gain since the 2020 recession.

Slower spending could also be a sign of an economy headed for trouble.

The Federal Reserve is sharply raising interest rates to tame high inflation, but that’s making it harder for Americans to buy new homes, new cars or other big-ticket items. It’s also raising credit-card fees and the cost of business loans.

Trading up

Sharp swings in the U.S. trade deficit this year have had a huge impact on GDP, obscuring what’s really going on in the economy.

The surprising 1.6% drop in first-quarter GDP, for instance, was entirely due to a record trade gap. It shaved a whopping 3.1 percentage points of the economy’s growth rate.

The reverse is going to happen in the third quarter. A shrinking trade deficit is poised to add 3 percentage points to GDP.

These gyrations explain why it’s vital to look at the details of GDP to glean the true state of the economy. Focus on consumer spending and business investment for a clearer idea of what’s really going on.

State of business

Companies likely reduced spending in the third quarter in a potentially bad omen for the economy.

Part of the decline is understandable: Soaring mortgage rates have choked off home sales and new construction. Lower residential investment could subtract 1.5 points of growth from third-quarter GDP.

A housing slump is going to weigh on the economy through the next year.

Companies are also holding the line on new investment due to high prices and the rising odds of recession. That would further dampen economic growth.

One more wild card

Big swings in inventory levels — products made but not sold — have added to the confusion over GDP this year.

In the second quarter, for instance, slower business production lopped off almost 2 percentage points from GDP. That explains why the second-quarter officially showed negative growth.

inventory levels appear to have grown slowly in the third quarter as well and could trim a few percentage points off headline GDP.

Economic Report: U.S. new home sales retreat in September, partially reversing surprising gain in prior month

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