U.S. economic growth rebounded sharply during the third quarter, according to data released by the Commerce Department on Thursday, rising at an annualized rate of 2.6 percent and proving that the U.S. has avoided a recession thus far.

But beneath a strong headline number were several warning signs of a deeper slowdown ahead.

While household spending and exports helped fuel a strong quarter of growth, both are likely to fall as higher interest rates and inflated prices weigh on buyers.

Meanwhile, declines in business spending and other crucial economic engines are likely to accelerate as the global economy slows.

Here’s why the latest gross domestic product (GDP) estimate isn’t soothing recession anxiety.

Trade flows skewed our view of the economy

Much of the ebb and flow of U.S. GDP over the past year has been driven by short-term trade shocks fueled by the uneven recovery from the COVID-19 pandemic.

Over the first six months of the year, U.S. households gobbled up imports and foreign buyers, reeling from global shocks, spent much less on American exports. While the U.S. economy was still somewhat strong, the imbalance turned GDP growth negative in the first and second quarters.

That dynamic reversed in the third quarter, according to the Commerce Department data released Thursday, as American households spent much less on imported goods and exports to foreign countries rebounded sharply, thanks in part to U.S. energy exports. 

But as Europe slips into recession, experts say the U.S. won’t be able to count on exports propping up growth again.

“We see signs of weakening trade flows in early Q4 with the precipitous decline in ocean freight rates and congestion at domestic ports in October highlighting the impacts of waning US domestic demand. Meanwhile, the strong dollar and weakening global demand will drag on exports,” wrote Oren Klachkin, lead U.S. Economist at Oxford Economics, in a Thursday analysis.

The last hurrah for consumer spending?

Despite stubbornly high inflation and rapidly rising interest rates, consumer spending has grown over the past two years. Personal consumption expenditures, which make up roughly one-third of GDP, rose 1.4 percent in the third quarter after rising 2 percent in the second. 

Spending on goods has fallen steadily throughout the year, dipping 1.3 percent in the third quarter alone, after Americans spent far more on physical items than services for much of 2020-2021. Services spending rose 2.8 percent, but may also reflect higher prices for health care and shelter that are not subtracted from GDP data.

While the Federal Reserve may be heartened by slowing spending on goods, growth in services spending may prompt the bank to keep ratcheting up interest rates until households begin to pull back even more.

“Looking ahead, gradually cooling job growth and softening wage gains, coupled with depleting savings buffers, elevated prices and more costly borrowing rates, will constrain consumer spending,” Klachkin explained.

Softer domestic sales spell trouble

Consumer spending may still be on the rise, but another key driver of U.S. growth appears to be flattening out.

Final sales to private domestic purchasers — or, the money American households and businesses spend on U.S.-made goods and services — rose just 0.1 percent in the third quarter. It was the fourth quarter in a row that the metric declined.

Economists use final sales to private domestic purchases to gauge how the economy is faring without the impact of volatile trade flows or federal government spending. Steady declines in these sales may lead to slower growth and hiring in the future.

The economy “clearly is at risk of falling into recession in the near term,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM, in a Thursday analysis.

“It is critical that policymakers and firm managers prepare for a slowdown in demand.”

The housing sector is falling hard

While the U.S. economy has held up so far against rising interest rates, the housing sector is crumbling.

As home sales and prices plunged over the past three months, spending on residential construction plummeted 26.4 percent in the third quarter — almost 10 percentage points higher than the 17.8 percent decline in the second quarter. 

The Fed has likely triggered a recession within the housing sector by rapidly raising interest rates throughout the past year. The average 30-year fixed mortgage rate is now north of 7 percent after being below 3 percent in early 2021, making homes increasingly unaffordable even as prices drop.

“Now both mortgage purchase applications and pending sales are below 2018 levels. A four-year setback is a serious correction. With mortgage rates still elevated, we are in for further sales declines, but those should eventually bring price relief to those who need to move this winter,” wrote Taylor Marr, Redfin’s deputy chief economist, in an analysis. 

Inflation is slowing, but not fast enough

One unequivocal bright spot from the Thursday GDP report was a steep drop in one measure of inflation.

Prices rose 4.2 percent during the third quarter, as measured by the personal consumption expenditures price index, the Commerce Department’s inflation gauge. That’s much slower than the 7.3 percent inflation rate seen in the second quarter.

Slowing inflation may help assure Fed officials that their rapid interest rate hikes are having some dampening effect on price growth. Even so, the third quarter inflation rate is still twice the Fed’s annual target and just one of several ways the bank judges where prices are going.

“With inflation unlikely to retreat significantly in the near term, we expect the Fed to hike by another 75 [basis points] at next week’s November… meeting and 50 [basis points] in December” Klachkin wrote.