Democrats Given Late GDP Boost Before Midterms

The Democrats got an economic boost before the November midterm elections as the economy recovered to register 2.6 percent growth in the third quarter, ahead of expectations.

The positive growth figure gives the Federal Reserve more room to continue with interest rate hikes in a bid to curb inflation. The Fed has raised rates five times this year, from 0.5 percent to 3.5 percent, while inflation has remained over 8 percent since March.

Prior to the data being published, the estimates for GDP were across a fairly wide range, with a consensus of 2.4 percent. The Federal Reserve Bank of Atlanta's GDPNow estimate had the third quarter on track for 3.1 percent growth, while analysts at Goldman Sachs predicted 1.9 percent, which was an increase from their earlier estimates of 0.9 percent.

The Bureau of Economic Analysis said of the GDP data: "The upturn primarily reflected a smaller decrease in private inventory investment, an acceleration in nonresidential fixed investment, and an upturn in federal government spending that were partly offset by a larger decrease in residential fixed investment and a deceleration in consumer spending. Imports turned down."

Recession or No Recession?

The first thing to note is that the U.S. doesn't formally enter a recession solely because of two consecutive quarters of declining GDP. That measure, which is commonly used by other country's policymakers, isn't the model. Rather, the U.S. is in recession when the National Bureau of Economic Research says it is—or was, as sometimes recessions are declared long after the fact.

Some analysts think the U.S. is still heading for a recession, but perhaps not in 2022. Most predictions of a recession are down to the aggressive increases in interest rates by the Fed, which cool off the economy, pulling inflation lower.

Wells Fargo analysts said in a recent research note: "We still anticipate a mild recession to take place next year. But as we detail in our latest monthly report, recent momentum makes the start of recession by the beginning of the year less likely. We now see a downturn happening a bit later, beginning in the second quarter rather than the first."

Research firm Capital Economics hold a similar view, with Andrew Hunter, Senior U.S. Economist, writing earlier in October: "In light of the Fed's increasingly aggressive monetary tightening, we now think the economy is headed for a mild recession early next year… with the implied odds of the economy being in recession in six months' time now above 50 percent."

However, the Conference Board, a business think tank, is far more bearish. It wrote earlier this month: "Economic weakness will intensify and spread more broadly throughout the U.S. economy over the coming months with a recession to begin before the end of 2022.

"This outlook is associated with persistent inflation and rising hawkishness by the Federal Reserve. We forecast that 2022 Real GDP growth will come in at 1.5 percent year-over-year and 2023 growth will slow to zero percent year-over-year."