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GDP will likely show U.S. economy grew in the third quarter, despite inflation

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The U.S. economy is expected to have grown robustly in a sharp rebound from the first half of the year, but most Americans are unlikely to notice anything about the turnaround.

Persistent inflation continues to weigh heavily on both economic growth and household budgets, and has become a key flash point ahead of the midterm elections. A strong reading on the next gross domestic product report, scheduled to be released Thursday, would be welcome news for Democrats, who have been struggling to convince voters they have a plan to contain rising prices and put the economy on more stable footing.

Although the newest numbers are likely to look like improvements on paper, economists say they don’t reflect major changes in the economy, which could be headed for a recession in the next year.

“This is going to look better than the previous two GDP reports, but conditions on the ground haven’t changed very much,” said Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office. “Inflation is still taking a toll. Concerns about the Fed’s tightening remain. Things are not substantively different.”

GDP, the broadest measure of economic activity, is expected to have risen roughly 2.9 percent between July and September, according to a tracker from the Federal Reserve Bank of Atlanta. That’s in line with some of the stronger pre-pandemic years of economic growth.

It comes after six months of contraction, with the U.S. economy shrinking by 1.6 percent, then 0.6 percent in the first two quarters of the year. That first-half slump raised fears that the country was already in the throes of a downturn, though recessions aren’t typical when unemployment is near record lows. The official determination is made by a panel of experts, and economists generally agree that the U.S. economy has staved off a recession — at least this year.

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America’s return to growth stands in sharp contrast to other major economies, including Europe and the United Kingdom, which are either already in recession or almost certainly headed for one. China’s “zero-covid” policy has also become a drag on its economic growth, after long being one of the leading engines. (China has recently delayed releasing GDP data, obscuring its economic situation.)

The latest U.S. GDP figures are likely to be propped up by a narrowing trade gap, since the United States is importing fewer goods as a result of slowing demand. Plus, retailers’ inventory levels are expected to show stronger growth, as pandemic-era supply chain snags get ironed out. Neither of those factors have much bearing on Americans’ day-to-day life.

Economic uncertainty is one the biggest issues in the Nov. 8 midterms, where gun control, abortion rights and immigration also loom large. And the stakes are high: Democrats are within six seats of losing control of both the House and the Senate.

“Do not be fooled by a rebound in GDP,” Joseph LaVorgna, chief economist at SMBC Nikko Securities America and former Trump White House economic adviser, wrote in a recent note to clients. “Is the economy out of the woods? No. The economy frequently generates healthy gains in real GDP around the onset of recession. Indeed, this has happened in four out of the last six downturns.”

Why the U.S. economy shrank in early 2022

A growing chorus of economists say a 2023 recession is all but inevitable, as the Federal Reserve continues to aggressively raise interest rates in hopes of slowing the economy enough to control inflation. There are also rising fears that turmoil abroad, in Europe and Asia, could seep into the U.S. economy.

But for now, the economy remains strong by many measures. Unemployment, at 3.5 percent, is near historic lows and many Americans are getting pay raises. Business investment and consumer spending remain strong, even as households and business owners say they feel pessimistic about their finances and the direction of the economy.

The White House pointed to strong jobs growth and steady consumer spending — which makes up nearly 70 percent of GDP — as promising signs that the economy remains robust.

“If you’re trying to understand strong growth in the U.S. economy, obviously the job market is a critical contributor,” said Jared Bernstein, a member of the president’s Council of Economic Advisers. “Most people get their income through the job market — it’s about paychecks, not stock portfolios — so if people are working and getting ahead, that’s going to be an important contribution to the economy.”

Economists are keeping a close watch on one key measure that strips out factors like trade and retailers’ inventory levels. That metric, final sales to private domestic purchasers, offers a clearer look at U.S. demand and has increased every quarter since the beginning of the pandemic. However, growth rates have begun tapering off this year, suggesting that economic gains are slowing, even while GDP ticks up.

“The nuance really matters right now,” said Andrew Patterson, senior international economist at Vanguard. “If you look at the underlying metrics, consumption by households, businesses and government is trending consistently downward. We may see positive GDP growth this time around, but that’s because of a drop in imports rather than higher consumption.”

Biden’s rescue plan made inflation worse but the economy better

Reading economic tea leaves, though, is often as much about household and business perceptions as it is about actual numbers. Even with a booming job market and brisk spending, many Americans feel incredibly pessimistic about the economy. Consumer sentiment remains near record lows, with many Americans saying they expect an even rockier road ahead, according to a closely watched index from the University of Michigan.

That gloom is driving voters across the country to reassess their decisions ahead of the midterms. Polls consistently show that inflation remains a top issue for many Americans.

In Nashville, Cheryl Beaumont is voting for Democrats for governor and Congress, though she says several friends are switching to Republican candidates because of economic concerns. Many are struggling with higher food and gas costs, she said, and don’t feel like the current administration is doing enough to bring down prices.

“Democrats are still out there talking about gun safety and abortion, but the real worry for everyday Americans is: How do I feed my family? How do I pay rent?” said Beaumont, 52, who handles transportation logistics for a shoe retailer. “They want a plan. People don’t have the luxury of putting principles in front of inflation anymore.”

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Prices have risen 8.2 percent in the past year, government figures show, though many necessities like groceries, gas, utilities and health care are up considerably more. As a result, more Americans are dipping into their bank accounts and taking on more credit card debt to make ends meet. Many say they feel a growing sense of despair, as pay raises and pandemic savings get wiped out by inflation.

Philip Hyatt, who owns a barbecue catering business in Carson City, Nev., says recession concerns have prompted many clients to hold off on bookings for next year. At the same time, he’s facing double-digit price increases on just about everything, from spices to spare ribs, and says he will vote for Republicans in the midterms, in part because he feels President Biden has not done enough to address soaring costs.

“A lot of this inflation was going to happen no matter who was in power,” he said. “But I also see things happening in the White House that are not conducive to getting us through this or relieving any of these pressures.”

But while voters still say the economy is their biggest concern this fall, there are signs that many Americans are starting to feel at least slightly better about their finances as gas prices tick down from the summer’s record highs.

Republicans hold the advantage on the issues most concerning Americans

Theresa McCloskey, who owns a graphic design and printing firm near Philadelphia, has been dogged by supply shortages and rising prices. But she says she’s more worried about abortion rights. Although she often votes for candidates on both sides of the aisle, she plans to stick squarely with Democrats this time around.

“Even though as a business person, my job literally puts a roof over my head, I believe personally that my rights as a woman — and the rights of my daughter and nieces — are far more important than anything the economy can throw at me,” the 62-year-old said. “I don’t care what things cost. I’ve worked three jobs as a single mother before, and I will do it again if that’s what it takes to hold on to my rights.”

McCloskey, who has cut back on dining out and travel to save money, says she’s optimistic about the economy. Schools, car dealerships and other clients have continued to shell out for business cards, brochures and large banners. Her sales are on track to exceed last year’s by 20 percent, and she’s hopeful the United States can avert a recession.

“Inflation is a difficult right now,” she said. “But if things get more expensive, either I cut back more or I get another job. I’m not going to worry yet.”

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