The U.S. economy grew at a 2.6% annualized rate in the third quarter, returning to expansion after real gross domestic product declined in each of the first two quarters of 2022. The Bureau of Economic Analysis’ advance estimate shows that stronger exports, consumer spending, nonresidential investment and government spending outweighed declines in residential investment and private inventories.

The rebound reduces the force of arguments that the economy is already in a broad recession, but it does not eliminate the underlying slowdown. Housing is contracting under the pressure of sharply higher mortgage rates, inflation continues to erode purchasing power and the Federal Reserve is deliberately tightening financial conditions to reduce demand.

Trade delivers an outsized contribution

Net exports were a major driver of third-quarter growth. Exports increased while imports declined, reversing some of the drag trade placed on GDP earlier in the year. Because GDP measures domestic production, fewer imports mechanically raise the calculation when other components are unchanged, meaning the headline 2.6% rate overstates the strength of domestic final demand if read in isolation.

Consumer spending still increased, with gains in services offsetting weakness in some goods categories. Business investment in equipment and intellectual property also contributed, while spending on structures remained subdued.

The broader economic environment described in the Federal Reserve’s October Beige Book is consistent with a mixed expansion: modest growth in many districts, continued labor shortages, elevated prices and weakening demand in interest-sensitive sectors.

Housing is the clearest casualty of higher rates

Residential fixed investment fell sharply again, reflecting a housing market that has turned rapidly as the Federal Reserve raises interest rates. The Census Bureau’s September new-home report estimated sales at a seasonally adjusted annual rate of 603,000, down 10.9% from August and 17.6% from a year earlier. The median sales price was $470,600.

Mortgage costs have risen far faster than household incomes, reducing purchasing power even where nominal home prices remain high. Builders are confronting cancellations and slower traffic, while existing homeowners with low fixed mortgage rates have less incentive to move.

Housing’s decline matters beyond construction. Residential activity supports brokers, lenders, building-material suppliers, furniture retailers and local tax bases. A prolonged contraction can therefore transmit monetary tightening through multiple parts of the economy.

Households keep spending, but inflation absorbs income

BEA’s September income and spending report shows personal consumption expenditures increasing 0.6% in current dollars during the month and 0.3% after adjusting for prices. The PCE price index was 6.2% above its year-earlier level, while the index excluding food and energy was up 5.1%.

Those figures highlight the central tension in the economy: consumers are still spending, but a significant share of nominal growth reflects higher prices. The personal saving rate stood at 3.1% in September, leaving households with a smaller cushion than during the period of pandemic stimulus and unusually high saving.

Consumer confidence also weakened in October. The Conference Board’s monthly survey reported its index falling to 102.5 from 107.8, with respondents more cautious about current business conditions and the near-term outlook.

Inventories and goods flows remain volatile

The Census Bureau’s advance economic indicators show a September goods trade deficit of $92.2 billion, up from August, while wholesale and retail inventories continued to rise. Inventory swings have had an unusually large influence on quarter-to-quarter GDP as companies adjust from pandemic shortages to changing consumer demand.

Retail activity is also slowing in real terms. The Census Bureau’s September retail-sales estimate put sales at roughly $684 billion, essentially unchanged from August but 8.2% above a year earlier in nominal dollars. With consumer inflation also running near 8%, much of that annual increase reflects price changes rather than larger volumes of goods.

The third-quarter GDP rebound therefore should not be read as a return to the rapid recovery of 2021. It shows that the economy remains capable of growing even as monetary policy tightens, but the composition is uneven and several forward-looking sectors are weakening.

The next question is how much tightening the expansion can absorb

The Federal Reserve is expected to continue raising rates because inflation remains far above its 2% objective. That means the forces restraining housing, credit and business investment are likely to intensify before they ease. At the same time, the labor market remains strong enough to support household income and service spending.

For policymakers, the 2.6% GDP figure offers no simple signal. It is stronger than the first half of the year but depends heavily on trade, while domestic demand is slowing. The economy has returned to positive growth, yet the deliberate effort to cool inflation is still working through borrowing costs and household budgets. Whether the United States can preserve expansion while bringing inflation down remains the defining economic question heading into the final quarter of 2022.