U.S. Q3 GDP overshot IMF forecasts, but growth volatile

The International Monetary Fund may need to raise its forecast for U.S. growth after stronger-than-expected third-quarter GDP data, a senior IMF official said on Wednesday, but Federal Reserve rate hikes are starting to cool demand, especially in housing.

Nigel Chalk, acting director of the Fund’s Western Hemisphere department, said in an interview that the latest IMF World Economic Outlook forecasts for 1.6% U.S. real GDP growth in 2022 had assumed a lower third-quarter print than the 2.6% annual growth rate reported last week by the Commerce Department.

“It was a strong report. It was definitely a stronger quarter than we had in our forecast in the October WEO so leading from that sense, there’s upside,” Chalk said.

But he said that U.S. GDP has been extremely volatile this year, coming off a 0.6% contraction in the second quarter, with the third-quarter data powered by an unusually large contribution from net exports coupled with a major buildup of inventories.

The IMF in its Oct. 11 World Economic Outlook had cut its U.S. growth forecast by 0.7 percentage point, based on the weak Q2 output earlier in the year. Along with other factors, such as rising food and energy costs prompted by Russia’s war in Ukraine and tighter monetary policy, the U.S. reduction offset upside surprises in Europe, leaving the IMF’s 2022 global growth forecast unchanged at 3.2%.

But Chalk said the third-quarter data reflected a shift in American consumption patterns that could cause negative spillovers to other countries, namely a shift back to spending on services, including travel, restaurants and healthcare, and away from pandemic-induced demand for imported goods.

“I think this re-composition of demand in the U.S. is a really important feature. Going forward into next year, the U.S. is slowing and that’s never good for the global economy,” Chalk said. “In addition to slowing, it’s shifting away from goods, and that’s sort of exacerbating that effect on the global economy.”

U.S. services demand is largely confined within U.S. borders, but demand for imports is falling, he said, adding, “when U.S. goods demand is declining, that’s bad for the rest of the world.”

The IMF has forecast that U.S. growth will decline further to 1.0% in 2023, with global growth falling to 2.7% next year.

But the Fund has also said given the uncertainties over the Ukraine war, energy prices, inflation and China’s property sector there was a 25% chance of growth falling below 2% – a phenomenon that has occurred only five times since 1970 – and a more than 10% chance of a global GDP contraction.

Chalk said that the U.S. housing market was already slowing markedly due to Federal Reserve interest rate hikes, and the higher rates would likely start to have a bigger effect on U.S. labor markets, wages and inflation in 2023.