GDP Growth

DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle

US Economy Is Fatter, Not Stronger

The third-quarter GDP isn’t showing resiliency and sustained growth

The headline gross domestic product (GDP) figure for the third quarter seemed to signal a return to growth and a significant improvement from the previous readings. Real GDP increased at an annual rate of 2.6 percent in the third quarter, in contrast to a decrease of 0.6 percent in the second quarter, according to the Bureau of Economic Analysis.

However, the reality of the economy is that stagnation persists.

If we look at the components of GDP, a few one-off surprises may reduce the optimism about the headline. The entire improvement came from a bounce in net trade as exports rose, mostly from natural gas and oil, and imports collapsed. This huge boost from the external sector is likely to reverse in the fourth quarter, as the nominal trade deficit widened to $92 billion in September. The advance report shows that exports fell by 1.5 percent while imports rose by 0.8 percent. Furthermore, if the economy improves from lower imports in a quarter where domestic demand is stagnant, it clearly proves that overall demand is weaker.

Gross private domestic investment continues to be underwhelming and indicates a negative contribution to GDP of minus-1.59 while government consumption adds 0.42. Without the boost from government spending and net trade, the GDP would show a negative change.

Another crucial factor in the positive figure was consumption, adding 0.97 to GDP. While consumption remains solid, the pace is weaker and almost half of the contribution in the third quarter of 2021, as real disposable personal income—personal income adjusted for taxes and inflation—remains poor. It increased 1.7 percent in the third quarter but decreased 1.5 percent in the second quarter. Real disposable income is down 3.9 percent from a year ago.

One of the surprises and biggest drivers of improvement is the reduction in the GDP deflator, which stands at 4.1 percent—the lowest since the second quarter of 2020—when it was 9.1 percent in the previous quarter of 2022 and an average of 6 percent in almost seven quarters. A lower GDP deflator translates into a higher real GDP figure.

While consumption growth is still positive, it was offset by weak performance in investment, particularly residential investment, which contracted at a 26 percent annualized rate in the third quarter.

If we want to understand the strength of the domestic economy, the best way is to analyze the figure of final sales to domestic private purchasers, which slowed to 0.1 percent annualized in the third quarter, a significantly poorer reading than the growth of 0.5 percent in the second quarter.

The third quarter GDP figure isn’t proving the resilience and robust growth of the United States; it’s showing a stagnant domestic economy saved by the energy crisis abroad and lower demand for imported goods.

This GDP figure isn’t good on its own, but it’s even worse when analyzed in the context of a massive fiscal stimulus. In September, the public debt of the United States was around $30.9 trillion, around $2.5 trillion more than a year earlier. With a $1.37 trillion deficit in fiscal year 2022, the recovery of the United States is shockingly poor. Those who consider deficit spending a tool for growth should be alarmed at the nonexistent fiscal multiplier of government spending and the rising structural debt.

The third quarter GDP isn’t proof of the success of demand-side policies; it’s evidence of the disastrous result of wrongly called stimulus plans.

The unstoppable trend of deficit and debt isn’t stimulating anything except the size of government and the unsustainability of public accounts. The U.S. economy is in much better shape than the European Union or Japan, no doubt. But it isn’t stronger. It’s fatter.

The entire improvement came from a bounce in net trade as exports rose, mostly from natural gas and oil, and imports collapsed. This huge boost from the external sector is likely to reverse in the fourth quarter, as the nominal trade deficit widened to $92 billion in September.