Commentary Directory

Q3 2022 GDP Preview

Jacob Hess

October 23, 2022

• GDP
• Forecast

Before the Fed gets together, we’ll get some important economic data points to digest including US Q3 GDP and the PCE price indexes for September. This will be accompanied by central bank announcements from the ECB, the Bank of Japan, and the Bank of Canada which will provide the backdrop for the Fed’s early November decision. There have already been some signs of central banks in other countries leaning towards a pivot (the Reserve Bank of Australia and the Bank of England opted for smaller hikes in their last announcements), and that transition will be on FOMC members’ minds next week.

The Q3 2022 GDP and September PCE report will be so crucial in showing how the economy is reacting to the rate hikes that have been administered so far. So far this year, we have yet to see a positive quarterly growth rate with the Q1 2022 report coming in at -1.6% and the Q2 2022 report improving only slightly to -0.9%. The consecutive periods of contraction prompted discussion of whether or not the US economy is in a recession, and that discussion will be reignited this week. Many policymakers, including the Fed, will have more force in their pushback against using the “r” word if the Q3 GDP pops out a strong positive number.

This is what the Atlanta GDPNow model forecasts. As of October 19, 2022, the GDPNow estimate for Q3 2022 is 2.9%, revised up from the 2.8% estimate at the beginning of the week and up from the 2.1% estimate that it began with on July 29. At the moment, this skates just above the upper range of the Blue Chip consensus GDP forecasts (according to the GDPNow chart) and more than a full percentage point above TD Bank and ING, which see Q3 2022 forecasts of 1.1% and 1.5% respectively. The GDPNow forecast is not alone in its optimism though as Wells Fargo posted its most recent estimate at 3.0% in its October US Economic Outlook report.

Here’s what we see:

• Personal consumption was relatively strong in Q2, up 2.0% QoQ SAAR, after a strong June saw consumption growth 1.2% MoM. The first two months of the third quarter showed consumption pretty much flat with elevated inflation stabilizing but not declining. It would take a hefty gain in September for consumption to have any type of strong showing in Q3, and that is unlikely to happen given how hawkish the Fed was in Q3, how high goods prices got, and how low consumer sentiment was. PCE is likely to come in at 0.6% QoQ SAAR with a moderate decline in goods consumption offsetting a moderate decline in services consumption.
• The massive -14.1% QoQ SAAR decline in gross private domestic investment in Q2 was a result of large declines in investment in structures, both residential (-17.8% QoQ SAAR) and nonresidential structures (-12.7% QoQ SAAR). August readings of construction spending were dismal with residential construction spending down -1.0% MoM and nonresidential construction spending down -0.4% MoM. The decline in private inventories also made a significant negative contribution (almost -2.0 ppts). This quarter, the negative effect is likely to be more muted as major inventory adjustments have likely already been done.
• The government spending component has made negative contributions to GDP for the last five quarters as it continues to back away from programs that provided liquidity during the pandemic. With that being said, there hasn’t been much in new spending passed as midterm elections are approaching in November, so this component will likely remain flat and or/slightly lower.
• The trade deficit was a major part of the Q1 GDP miss, with a -3.13 ppt contribution, but it rebounded swiftly in Q2 with exports growing 13.8% QoQ SAAR and imports up just 2.2% QoQ SAAR in that period. Data for July and August show an even sharper decline in the trade deficit, down -$13.5 billion since July. At this pace, the impact of net exports on GDP in Q3 will likely be similar and will actually offset much of the weakness elsewhere.

All that being said, the Q3 2022 GDP report should show that the economy grew 1.6% QoQ SAAR. A light improvement in consumption will offset more weakness in domestic investment which will see a small decline than Q2. The biggest driver of GDP growth will be net exports which could provide up to 1.5 ppts of growth in the quarter. Government consumption and inventory changes will be smaller drags on GDP growth than in Q2 but will still be felt.

One unknown that could cause some negative surprise is the impact that Hurricane Ian had on Florida. An earlier IHS Markit estimate had the destruction of Ian shaving off about 0.2 ppts from national GDP measures which seems like a reasonable projection. This suggests that GDP could come in anywhere from 1.4-1.6% QoQ SAAR if that impact makes its way into the report.