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Today, October 27, the Bureau of Economic Analysis reported that U.S. GDP grew by an annualized 2.6% rate (adjusted for inflation) in the third quarter. That was better than the 2.4% rate that economists had projected. After two down quarters to begin the year, this gain brings the U.S economy back close to break even for the year.

But that was the end of the good news in this report.

Investment in residential housing–home sales to you and me–plunged at an annual rate of about 26%–a huge drop–in response to mortgage rates climbing to 7% recently.

Consumer spending, which makes up the bulk of the economy, rose just 1.4% in the quarter from the previous three months. The first three quarters of 2022 have seen the weakest growth in consumer demand since the Pandemic recession of early 2020.

Inflation-adjusted business investment advanced 3.7%–that’s a solid performance–but at the same time, a separate report Thursday showed orders for non-defense capital goods, excluding aircraft–a proxy for business investment–dropped 0.7% in September, the biggest decline in more than a year.

Most of the growth in GDP came from a decline in U.S. imports and an increase in inventories as companies restocked after Covid supply chain problems. Stripping out trade and inventories, final sales to domestic buyers showed an annualized growth rate of just 0.5%. That compares with an average of almost 2.6% over the five years before the pandemic.

Final sales basically stalled in the quarter. And that’s a sign that the economy is losing steam. Which raises the odds of a recession.
“A return to economic growth in the third quarter obscures continued signs of a slowdown in components that provide a cleaner signal of momentum… The Fed is likely to view the weaker components as intended consequences of its tighter monetary policy, and not as reasons to back off the tightening cycle just yet,” Bloomberg economists Andrew Husby and Eliza Winger wrote.

“We expect third-quarter 2022 to mark the peak in quarterly growth, as the cumulative effect of tighter monetary policy begins to push growth below potential,” Morgan Stanley U.S. economists. Those economists expect fourth-quarter GDP will grow by just 0.8%.