Advanced US GDP growth numbers are out. The third quarter saw real growth after inflation of 2.6%. That’s a significant improvement over the 1.6% and 0.6% drops in the first and second quarters of 2022.
But it’s unlikely to persuade the Federal Reserve to put off its next expected rate hike in November.
According to the Bureau of Economic Analysis, “The increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment.” Also, a drop in imports, which are counted as reductions in GDP as the production doesn’t happen domestically, helped.
While consumer spending was up, it “decelerated,” and normally that category contributes close to 70% of GDP. Residential fixed investment is “purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants,” according to the BEA definition. The fall in housing construction and purchases has been in the news, but it could also be that landlords are tightening their belts and investing less in residential equipment, which includes appliances and furniture.
Private inventory investment means that businesses are cutting back on buying inventory, but that could owe to multiple reasons. One might be expectations of slower sales. Another, that after the ongoing supply chain issues, companies have largely stockpiled enough against future shortages and no longer need to build supplies.
Normally, increases in nonresidential fixed investment would be good news for CRE, as it includes nonresidential structures, equipment, and software. But as the BEA noted, “Within nonresidential fixed investment, increases in equipment and intellectual property products were partly offset by a decrease in structures.”
So, overall improved economic news didn’t include better conditions for CRE.
The question is what this might mean for Federal Reserve plans looking forward. Assumptions have been that the Fed would call for another 75-basis point hike in the benchmark federal funds rate, which would push financing rates up even further.
The answer is that the Fed is unlikely to put off a hike at this point.
“You know the old Milton Friedman saying that in situations of inflation the Fed raises interest rates until something breaks,” Giancarlo Santangelo, senior economics lecturer at Fordham University, tells GlobeSt.com. “We’re seeing the strong labor force, strong GDP. It’s a signal giving the Fed permission, so to speak to keep raising rates.”
And that’s a problem because there’s a lag effect in rate increases. “By the time we see GDP falling or unemployment going up, we will see months of that,” Santangelo adds. “That’s why people are concerned about recession because it is going to be bad.”
There is one bit of good news, according to a note from Cliff Hodge, chief investment officer for Cornerstone Wealth: “The GDP Price index slowed dramatically quarter over quarter and came in below expectations. This is another sign pointing to the likelihood that the worst of inflation may be behind us.“