Mixed Picture for the U.S. Economy in Q3

The government’s primary measures of U.S. third-quarter economic activity paint a mixed picture of the economy’s momentum after a lackluster first half of the year.

Inflation-adjusted gross domestic product (GDP), or the total value of all goods and services produced in the economy, increased at an annualized rate of 2.9 percent during the first half, Commerce Department data showed Wednesday. That reflects upward revisions to consumer and business spending, and compares with a previously reported 2.6 percent advance.

Meanwhile, another key official gauge of activity—known as gross domestic income—rose at a rate of 0.3 percent in the third quarter, after falling 0.8 percent in Q2/2022. Gross domestic income is a measure of the income generated and costs incurred from producing goods and services.

The average of the two figures, a gauge that the National Bureau of Economic Research’s (NBER’s) Business Cycle Dating Committee uses when making any recession call, increased 1.6 percent after falling in the first half of the year.

For Federal Reserve policymakers, who are raising interest rates at the fastest pace in a generation, the overall growth picture is one they want to see: in line with or slightly below the economy’s long-term trend, perhaps enough to slow inflation but not yet signaling a recession.

Meanwhile, a key gauge of inflation—the personal consumption expenditures price index excluding food and energy—rose at an annualized rate of 4.6 percent in the third quarter.

The underlying picture of growth is similar to the preliminary release. While the details show resilient consumer spending and business investment, the biggest contributor to GDP was the volatile net exports category. Government spending also rose.

Stripping out the trade and inventories components, a key gauge of underlying demand known as inflation-adjusted final sales to domestic purchasers increased just 0.9 percent in the third quarter. Meanwhile, the GDP data shows that personal consumption, the biggest part of the economy, climbed at a 1.7 percent pace, a slowdown from the prior quarter but up from the previously reported 1.4 percent increase. Services spending increased, while outlays on goods fell for a third quarter.

Looking ahead, household spending is set to drive growth in the fourth quarter. Prior to the release, the Federal Reserve Bank of Atlanta’s GDPNow model estimate for economic growth in the final three months of the year was 4.3 percent. Inflation-adjusted spending data for October will be released Thursday.

Corporate Profits

After-tax profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, shrank in the third quarter to 14.9 percent, from 16.2 percent in the second quarter.

Across the economy, adjusted pretax corporate profits decreased 1.1 percent last quarter, marking the first decline since 2020, but were up 4.4 percent from a year earlier.

This year many companies have successfully passed along higher costs of labor and materials as they try to protect or even expand their profit margins. But some companies have recently indicated a hesitation to pursue further aggressive price hikes amid the uncertain economic environment.

Additional Details

• Net exports contributed 2.93 percentage points to third-quarter GDP.
• Separate data out Wednesday shows that the nation’s merchandise trade deficit widened in October to $99 billion, the most since June, from $91.9 billion.
• Residential fixed investment shrank an annualized 26.8 percent, slightly weaker than initially forecast, and subtracted the most from GDP since 2007.

—With assistance from Matthew Boesler & Jordan Yadoo.

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