by Paige Terryberry
Senior Analyst for Fiscal Policy, John Locke Foundation
After two consecutive quarters of negative growth, the U.S. economy saw gains in the third quarter. U.S. gross domestic product (GDP) increased by 0.6% in Q3, according to the advance estimate released today by the Bureau of Economic Analysis.
At an annual rate, GDP increased 2.6%. There will be two more estimates this year to re-evaluate as the data are subject to updates.
Peeling back the curtain, however, the economy still shows signs of a downturn.
Part of the GDP increase is due to an uptick in federal government spending, which is included in the measure. Net exports also added to the growth.
Yet a key component of GDP, consumer spending, slowed this quarter to 1.4% after a 2.0% uptick in Q2. Consumer spending makes up more than two-thirds of GDP. But contrary to common thought, consumer spending is not two-thirds of economic activity. The consumer spending issue is one symptom of a bigger problem: decreased private investment. This is down 8.5% (at an annual rate) over the quarter, following a dramatic 14.1% decrease in Q2, a bleak indicator for what lies ahead.
Big government advocates promote fiscal stimulus to drive consumer spending. But this misses the real issue of depressed business investment. Savings makes such investment possible, and unfortunately, today, Americans are struggling to save.
Consumer sentiment is also at historic lows. Moreover, the major U.S. banks are reporting incredible increases in credit card spending, a bleak indicator for the overall health of the economy. As wages fail to keep up with inflation, more spending likely means more debt.
With the federal reserve continuing its effort to raise rates in an attempt to tamp down on inflation, consumers may be forced to cut back in the coming months.
The rise in GDP is certainly welcomed, but it is no proof that a greater recession has decamped.