Skip to Content

GDP increased more than expected in Q3

November 30, 2022 Blog 2 min read
Jim Baird Wealth Management
Upward revisions to consumer spending lifted the most recent estimate of Q3 GDP modestly, but there are still signs of a slowdown in economic momentum.

GDP QoQ (Annualized % Change) - History

Coming off a weak first half of the year, the resurgence in GDP in the third quarter was stronger than previously believed. The second estimate for Q3 GDP was revised upward to 2.9% — lifted by better consumer spending.

Personal consumption expanded by a revised 1.7% in Q3, despite persistent inflation gnawing away at household spending power. Representing over 70% of economic activity, the importance of a strong consumer sector can’t be overstated.

Despite a pickup in personal consumption expenditures, a broader look at the health of consumers and their contribution to growth is a bit murkier. The decline in residential investment accelerated in Q3, shaving 1.4 percentage points off GDP growth as surging home prices and mortgage rates choked off what had been a robust housing market. The combination of household consumption and residential investment doesn’t paint a terribly favorable picture for American households.

What’s fueling consumer spending? It’s not real income growth, which has been weighed down by the highest consumer inflation in decades. Exceptionally tight labor conditions in the past year had lifted wages, but for many Americans, the benefit of larger paychecks was lost to higher cost for food, gasoline, and almost everything else.

Consumers have managed to continue to increase spending, albeit at a slower pace, by ratcheting back savings and tapping available credit. Most households had saved more and borrowed less in the past few years, providing some dry powder for continued spending despite surging prices. That reservoir of cash will only continue to fuel spending to a point, particularly with wage gains already rolling over. The outlook for further consumer spending momentum may boil down to a race between the exhaustion of cash reserves and declining consumer inflation. Can the dry powder of excess cash keep consumers afloat until prices stabilize? Or will persistent inflation eventually wear consumers down? That answer will become apparent in the coming year.

Although still a significant challenge, there was some modestly good news on inflation in the report. The PCE deflator increased by 4.6% annualized for the quarter. While still more than double the Fed’s target, the headline increase was much more restrained than in the first two quarters this year, both of which came in at 8.0% or higher. It was also the lowest quarterly gain since the first quarter of 2021, when inflation pressures were first starting to build.

Any assessment of broad-based economic momentum based solely on stronger top-line growth should be tempered. Weak GDP in the first half of the year was arguably skewed by the inflow of backlogged imports and volatile inventory levels. Conversely, final sales to domestic purchasers have slowed considerably over the course of the year, declining from 9.5% in Q1 to 5.7% in Q3. That deceleration is notable, even if the impact in real terms is muted by the apparent easing in inflation measures.

The bottom line? The upward revision to Q3 GDP does little to change the overall assessment of the state of the economy. Underlying momentum still appears to be slowing, buffered by consumers tapping into savings to sustain spending. How long will consumers be willing to continue to do so? The answer to that may also hold the key to the broader questions of whether or not the United States is heading into a recession and, if so, when.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

Related Thinking

empty office
November 17, 2022

First-time jobless claims eased last week despite growing talk of layoffs

Blog 2 min read
Person holding shopping bags walking
November 16, 2022

Retail sales increased 1.3% in October, beating expectations

Blog 1 min read
Empty shopping mall with store windows
November 11, 2022

Consumer sentiment fell by more than five points in November

Blog 2 min read