U.S. GDP rebounds in Q3, but demand stalling

STORY: The U.S. economy recorded its first quarter of positive growth this year, according to an advance estimate from the Commerce Department on Thursday, putting to rest - at least for now - fears that the U.S. is currently in a recession.

Thursday’s report – which follows two consecutive negative quarters, showed U.S. gross domestic product rebounded more than expected in the third quarter, rising by an annualized rate of 2.6%.

But growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed from the previous quarter.

The report also showed signs of a housing market buckling under the weight of surging mortgage rates, which recently climbed past the 7% mark, the highest level in more than 20 years.

Alex Pelle is an economist at Mizuho Securities.

"I think the basic message here is that interest rate sensitive sectors of the economy are starting to contract and they are bearing the brunt of the Fed's adjustment in interest rates. However, the consumer and the labor market are still doing all right, and they are showing a resilience that will mean that the Fed is likely to continue hiking until they see a more material cooling down in both the consumer sector and in the labor market. And it's only then that the Fed can be confident that they're going to see a sustainable return to 2% inflation, because the U.S. has an inflation problem, and the only way to deal with it that we know how is for the Fed to continue hiking interest rates."

The Federal Reserve has lifted interest rates by a full three percentage points so far this year as it seeks to engineer a slowdown to bring down inflation.

There was some encouraging news on that front, as one measure of inflation in the economy rose at a 4.6% rate, falling from a 8.5% pace in the second quarter.

But Pelle said a recession was not off the table.

"I don't think the U.S. economy is in a recession right now, but I think a recession in 2023, or going forward, is quite likely. And that is because the labor market, the Fed likely needs to see the labor market cool down significantly in order to be confident that inflation is going to return to 2%. And so that will likely entail some sort of recession. "

Inflation and a looming recession are top of mind for voters as the U.S. midterm elections near - now less than two weeks away.