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This commentary is written by PNC Chief Economist Gus Faucher.
- Real GDP and real gross domestic income were both revised higher in the third quarter, to 3.2% and 0.8%, respectively.
- Growth has slowed in 2022 from 2021 but remains solid. But higher interest rates are weighing on growth, with a contraction in housing.
- PNC expects a mild recession in 2023 as the Federal Reserve continues to raise interest rates.
Real GDP in third quarter of 2022 was revised somewhat higher in the third estimate, to 3.2% at an annual rate. This is up from 2.9% in the second estimate, and 2.6% in the advance estimate. The upward revision in the third estimate came from upward revisions to consumer spending and business fixed investment, somewhat offset by a downward revision to business investment in inventories.
Real GDP fell in both the first and second quarters of 2022. But with the increase in the third quarter, it is now slightly above its level in the fourth quarter of 2021.
On a year-ago basis real GDP was up 1.9% in the third quarter, compared to year-over-year growth of 1.8% in the second quarter. Growth has been uneven in 2022 after a very strong recovery in 2021 following the Viral Recession but remains solid. Growth in the fourth quarter of 2021 was 5.7% year-over-year
A smaller trade deficit added 2.9 percentage points to annualized real GDP growth in the third quarter, with consumer spending adding 1.5 percentage points. Business fixed investment added 0.8 percentage point. Residential investment was a big drag as higher interest rates weighed on homebuilding and renovations, subtracting 1.4 percentage points. Inventories were also a drag, subtracting 1.2 percentage points from third quarter growth.
Real gross domestic income, an alternative measure of the size of the economy that measures income to households and businesses, was also revised higher in the third quarter, to 0.8% annualized in the third estimate, from 0.3% in the second estimate. Real gross domestic income increased 0.8% in the first quarter of 2022, and then fell 0.8% in the second quarter. On a year-ago basis real gross domestic income was up 1.8% in the third quarter.
PCE inflation (the Federal Reserve’s preferred inflation measure) was unrevised in the third estimate, up 4.3% at an annual rate. But the core PCE price index, which excludes volatile food and energy prices, was revised slightly higher, to 4.7%, from 4.6%. Inflation remains far above the central bank’s 2% objective, and the Fed will continue to hike the federal funds rate in early 2023 in an effort to slow growth and push inflation lower.
According to the third estimate for third quarter GDP, the U.S. economy is still expanding in the second half of 2022, but growth has slowed dramatically from last year. In particular, housing and inventories have been drags on growth this year. Higher mortgage rates have weighed on homebuilding and home renovations and repairs, and an easing in supply chain problems has led to less inventory accumulation. Trade was a big positive in the second and third quarters, after subtracting from growth in the first quarter of 2022. But trade will be a negative in the near term due to the strong U.S. dollar and weakness overseas.
Consumer spending has been the steady, big driver of growth this year. Households have been increasing their purchases, even with the drag from high inflation, spending down the savings that they accumulated in 2020 and 2021 from government stimulus support and limited opportunities to purchase. But the drags on consumers are increasing. Inflation is reducing the value of their pay, the saving rate is near a record low, higher interest rates are making it more expensive to borrow and declines in stock prices and now home values are reducing household wealth.
PNC expects a mild recession starting in the spring of 2023 as the hit from higher interest rates continues to work its way through the economy. Interest-rate sensitive industries like housing, consumer spending on durable goods, and business investment will lead the recession. Real GDP will contract about 1%, with the unemployment rate increasing from its current level of 3.7% to 5.5% in the first half of 2024.
About the author: Prior to joining PNC in December 2011, Faucher worked for 10 years at Moody’s Analytics, where he was a director and senior economist. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He serves on the board of directors of The Economic Club of Pittsburgh - the local chapter of National Association of Business Economics (NABE). He is also co-chair of the Financial Roundtable of NABE. Faucher earned a Ph.D. in economics from the University of Pennsylvania and a B. A. in economics from Cornell University.