A Recession Reprieve, for Now

He shouldn’t get carried away. Net exports accounted for nearly all of the growth, increasing 14.4%. But that trend is unlikely to continue with a strong dollar and a possible global recession looming. Government spending also chipped in, mainly in higher state and local government compensation, but that isn’t the stuff of a durable expansion.

The biggest disappointment was an 8.5% decline in private domestic investment, compounding a 14.1% drop in the previous quarter. The investment pullback is the steepest since the pandemic, and it’s particularly acute in structures. Businesses are still hiring to meet current demand, but they’re getting shy about making bets they can’t reverse if there is a recession.

Residential investment plummeted by 26.4% and continued its deepest sustained slide since 2006. The housing slowdown has tracked expectations following the record surge in the previous two years and the rise of mortgage interest rates to more than 7%. But fewer sales and new-home starts will depress demand for construction and household goods.

Consumer spending increased, but only by 1.4%. Inflation seems to be affecting consumer and business confidence. The National Federation of Independent Business said this month that the vast majority of small-business owners expect worse conditions in the next six months.

The positive GDP report isn’t likely to stop the Federal Reserve from its plans to keep raising interest rates to reduce inflation, including another 75 basis points next week. The jobless rate is still low, at 3.5%, and that allows political running room to raise rates.

Higher rates mean a greater risk of financial trouble and perhaps recession, which is why the third-quarter growth may only be a reprieve. With an election looming, both parties should be thinking about supply-side policies to counter the impact of rising rates. Too bad there isn’t any sign of that from the White House.