December 13, 2022

US real Gross Domestic Product (GDP) grew at an annualized q/q rate of +2.9% in Q3, better than expected, after two quarters of negative growth. This is as of revised data released November 30, 2022.

The composition of US GDP growth in Q3 was: +2.9% = +1.2 consumption, +0.7 business investment, -1.0 inventories, -1.4 housing, +0.5 government spending, +2.9 net exports.

In comparison, the GDP composition in Q2 was: -0.6% = +1.4 consumption, +0.0 business investment, -1.9 inventories, -0.9 housing, -0.3 government spending, +1.2 net exports.

Consumption grew at a +1.7% pace in Q3, down from +2.0% in Q2. It contributed +1.2 points to GDP growth, down from +1.4 points.

Business investment grew at a +5.1% pace in Q3, contributing +0.7 points to GDP growth, after coming in almost flat in Q2.

Businesses continued drawing down on inventories, shaving -1.0 points off current output (GDP) in Q3, after shaving off -1.9 points in Q2.

Residential investment plunged at a -26.8% pace in Q3, shaving -1.4 points off GDP growth, after falling -17.8% in Q2. This marks its 6th straight quarter in decline, and the pace of that decline is gaining speed.

Government spending rose at a +3.0% pace in Q3, up from a decline of -1.6% in Q2, and added +0.5 points to GDP growth. This marks its first positive reading since 1Q21. All three main categories (federal defense, federal non-defense, and state/local) were all positive.

A shrinking trade deficit adjusted the GDP growth rate upwards by +2.9 points. This was due to both a +15.3% rise in exports and a -7.3% decline in imports. The trade deficit has shrunk for the last two quarters.

The PCE price index rose at an annualized q/q rate of +4.3% in Q3, down noticeably from +7.3% in Q2. This was mainly due to declining energy prices, as Core PCE (excluding food and fuel) rose +4.6% in Q3, down only slightly from +4.7% in Q2.

Unadjusted after-tax corporate profits fell -5.9% q/q in Q3, up +1.3% from a year ago.

The good news from the GDP report: inflation appeared to be easing, led by energy prices (whether that holds or not is another story). Business investment saw a rebound.

The bad news for the GDP report: the housing sector is in sharp decline (though that may help ease inflation). Consumer demand is cautious, at best, and corporate profits appear to be slipping.

The ambiguous news in the GDP report: the narrowing of the US trade deficit accounted for more than the total GDP gain. Rising exports are good news, but falling imports suggests weak domestic demand.

People who focus on the headline +2.6% GDP growth number will be pleasantly surprised. But when you look at the underlying numbers, it’s hard to walk away with the impression that the US economy is really that much stronger than it was in the first half.