Third-quarter gross domestic product is likely to spike off the back of a narrowed trade deficit, but the result doesn’t necessarily spell good news for consumers battling persistent inflation, economists told the Daily Caller News Foundation.
After falling in the first two quarters of 2022, prompting significant debate about whether the U.S. had entered a recession, GDP in the third quarter is predicted to grow at an inflation-adjusted rate of 2.3% annually, according to a Wall Street Journal survey of economists.
However, two economists told the DCNF that this is unlikely to forecast major improvements in consumers’ economic health, since the spike was mostly driven by trade trends that are unlikely to persist.
“Ordinarily, we think about increases in GDP as benefiting Americans, but that’s not always the case,” Heritage Foundation economist E.J. Antoni told the DCNF. “A rough metaphor [for the narrowing trade deficit] is a consumer being too poor to shop somewhere. It looks like international trade slowed down considerably in the third quarter, hardly a sign of prosperity.”
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This narrow deficit is unlikely to persist as a stronger dollar makes U.S. exports more expensive in foreign markets and foreign imports cheaper in American markets, Desmond Lachman, a senior fellow at the American Enterprise Institute and former deputy director of the International Monetary Fund’s Policy Development and Review Department, told the DCNF. This means that U.S. consumers will likely purchase more foreign products, while foreigners purchase fewer American goods, widening the trade deficit, Lachman said.
The third quarter’s narrower trade deficit is likely to contribute 2.2 percentage points of a 3.1% hike in GDP, according to the Federal Reserve Bank of Atlanta’s unofficial GDPNow model — a rough bellwether for official results published by the U.S. Bureau of Economic Analysis.
In contrast, the same model’s estimate of overall contribution by final sales to private domestic purchasers, a measure of consumer demand, fell from 3.44 percentage points in the first quarter of 2022 to just 0.2 percentage points in the third, according to the Federal Reserve Bank of St. Louis, which keeps a long-term record of the Atlanta branch’s forecasts.
This means that “down the road, the trade [deficit] is going to be a drag on the U.S. economy,” Lachman said. On top of this, inflation, and the Federal Reserve’s aggressive campaign to combat it via interest rate hikes, have blunted consumer demand for both basic goods and larger purchases like homes and automobiles, all signs that the fourth quarter is likely to be weak in spite of a third quarter spike, according to Lachman.
“This quarter, people think it’s [sic] going to be a bit of growth, but as I say, you should look at it against the what’s happened in the first part of the year and look at where we going,” said Lachman. “2.3% is not much to write home about.”
The trade deficit widened for the first time in September off the back of a stronger dollar, MarketWatch reported Thursday.
Since hitting a record high of $125.6 billion in March, the trade deficit is still down roughly 33%.
Inflation has remained persistently higher than economist’s expectations, posting a 0.4% monthly increase in September as compared to August, and an 8.2% annual increase. Supply chain issues that were causing more than 100 ships to queue outside of Los Angeles earlier this year have mostly resolved due to declining imports at the city’s port.
New manufacturing orders are forecasted to decline marginally in October, with backlogged orders helping maintain output, according to S&P Global’s “flash” Purchasing Managers’ Index using data from Oct. 6 through 21. Both Antoni and Lachman noted that a decline in manufacturing was a sign of weakened economic fundamentals going forward.
“Consider the third quarter GDP to be last call at the bar,” said Antoni. “The party is over.”
The Federal Reserve Bank of Atlanta declined to comment, citing a routine media blackout in advance of Federal Open Market Committee meetings, when the Fed sets major policy direction.
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