Great Expectations – Q3 2022 GDP

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

The Q3 Gross Domestic Product (GDP) growth rate of 2.6% was in line with the consensus. But it was anything but normal. The increase was entirely driven by a large increase in the trade balance. Net exports surged 2.8% due to a 1.6% increase in exports of energy commodities and military hardware, and a 1.2% decrease in imports. Inventory liquidation was lower than Q2, giving a boost to GDP.  Consumer spending rose 1%, mostly in services, offsetting a decline in consumer goods purchases. Capital spending creeped up with residential investment falling for the third straight quarter.

The big market reaction to this report came from the GDP price deflator rising just 4.1%, well below the 5.3% expected, and down more than half from 9.0% last quarter. But much of this was the result of a decline in the growth of import prices due to the rising dollar. With the dollar having declined over 4% from its September 28 top, import prices are not likely to repeat their magnified impact on the GDP deflator going forward.

Bottom Line? The report, excluding the trade balance, showed little core growth in Q3 and by itself should not change the Federal Reserve’s (the Fed) thinking/forecasts for 1-2% GDP growth. The main reason the GDP print was strong is because Europe is collapsing into a recession and is now overly reliant on US energy and weapons exports. It also did little to dispel fears that the US will eventually tip into a classical recession given the aggressive steps the Fed is taking to stamp out elevated inflation.

The decline in 10-year bond yields seems to be the ongoing reaction to the Fed in becoming more aware of the liquidity strains the strong dollar has created in global currency markets, anticipating a slowdown in their rapid ascent in the Fed funds rate. Those expectations were boosted by today’s (outlier) decline in the growth of the GDP deflator. The stock market reaction highlighted these events as both energy and industrial stocks are leading the advance.

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