By Diana Furchtgott-Roth*
With the Commerce Department announcement that GDP had grown at a 2.6% real rate in the third quarter, President Joe Biden declared, “Today we got further evidence that our economic recovery is continuing to power forward.” But soft spots in the GDP report point to problems ahead.
Americans are facing high prices and declining stock market portfolios. Tight labor markets and the feedback of inflation on wages are keeping nominal wage increases elevated and wiping out the wage-growth gains the American people experienced from 2017 through 2019.
Part of the gain in GDP comes from the value of exports, which rose 17% in real terms from the second quarter, accounting for 1.63 percentage points of the 2.6% increase in GDP. Due to Russian President Vladimir Putin cutting off natural gas supplies to Europe, the global price of energy has risen dramatically, far higher than inflation. This has led to higher prices for U.S. energy exports, which deliver an upward kick to GDP.
President Biden applauds higher GDP, but he has been desperately trying to lower oil prices. He has asked the Saudis to produce more. He has taken sanctions off Venezuela so Chevron can restart production there. He has taken oil out of the Strategic Petroleum Reserve.
Since the United States is a major oil producer, President Biden could lower oil prices by taking steps to increase future production. Rather than going to Venezuela and Saudi Arabia for oil, or tapping the Strategic Petroleum Reserve, he could instruct his agencies to speed up the pace of new drilling permits, reapprove existing drilling permits and approve more pipelines.
One reason GDP rose was due to federal government spending, which increased by almost 4% on an annual basis. State and local government spending also rose. This is not the sign of a healthy economy, but of future inflation ahead.
Real final sales to private domestic purchasers were disappointing. They rose by only one tenth of 1% from the prior quarter, compared with a rate of 1.3% during the first half of the year.
Although third quarter GDP numbers are positive, no one knows whether the Federal Reserve, through its rate increases, will drive America into a recession in 2023. As the Federal Reserve continues to raise the federal funds rate, borrowing becomes more expensive.
Companies cut back on proposed projects because borrowing costs more than the potential rate of return. People find that their mortgage, credit card and auto loan payments are higher, and they have less money to buy goods and to eat out. With purchases postponed and lower use of services, GDP growth is lower than would be the case otherwise.
It is troubling that this is already happening. Real private consumption, a driver of GDP growth, slowed to 1.4% from 2% in the second quarter.
Energy and food prices are taking a bite out of people’s incomes, and they can’t afford to spend as much as they did last year. This squeeze in consumption spending is likely to continue as interest rates rise and people need to spend more on mortgage payments, auto loans, and credit card balances.
The decline in residential investment of 7.4% from the prior quarter, due to rising interest rates, is the sixth consecutive quarterly decline. This is the outcome of rising mortgage rates. As housing continues to decline, people will not need to spend as much on appliances and furniture.
President Biden’s future economic policy depends on the next Congress taking a number of politically unpalatable steps: raising taxes; substantially increasing government spending, including entitlement payments; enabling federal agencies to impose burdensome regulations on businesses and ordinary Americans; increasing union power; and forfeiting America’s energy independence.
Standing alone, each initiative would be harmful to America’s economy. Combined with future Federal Reserve rate hikes, these initiatives would slow the economy in 2023 and following years.
The American consumer and the American economy would be better off if these provisions stall in a new Congress.
*Diana is director of the Center for Energy, Climate and Environment and the Herbert and Joyce Morgan Fellow.
This article is part of an agreement between El American and The Heritage Foundation.