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Nobel laureate Paul Krugman warns the US economy's rebound won't last - and flags housing and exports as key worries

Markets Insider 10/28/2022 (Theron Mohamed)
Paul Krugman. REUTERS/Brendan McDermid © REUTERS/Brendan McDermid Paul Krugman. REUTERS/Brendan McDermid
  • Paul Krugman brushed off the rebound in US GDP last quarter, saying it would be short-lived.
  • The Nobel laureate expects pressure on exports and housing demand to weigh on economic growth.
  • Krugman noted the Fed's rate hikes have boosted the dollar and increased mortgage costs.

Paul Krugman has shrugged off data showing US growth rebounded last quarter, as he expects a housing-market slump and weaker exports to shrink the economy down the line.

"While this report made all the people who screamed 'recession!' look as foolish and partisan as they were, it was not, if you look under the hood, a sign that the worst is over," he said in a  Twitter thread on Thursday.

"It suggests, at least to me, that there's a lot of contraction still in the pipeline," Krugman added.

The Nobel Prize-winning economist noted that a smaller trade deficit fueled the 2.6% annualized increase in US gross domestic product (GDP) in the third quarter. He expects that growth driver to disappear as the US dollar's surge this year has made American exports less competitive, and overseas recessions could sap demand for US products.

Krugman pointed to the Federal Reserve hiking interest rates from near zero in March to above 3% today as the key reason why he's still worried about an economic downturn. He noted that higher rates have created a trade headwind by boosting the dollar, and eaten into Americans' finances and their ability to buy houses by raising mortgage costs.

"Both should exert strong contractionary effects over time," he tweeted.

The New York Times columnist and economics professor added that real residential investment has only fallen by 12.5% since the fourth quarter of last year. He deemed that a fairly small decline when mortgage rates have soared and mortgage applications have plunged.

"So there's probably a significant amount of housing contraction still ahead," he said.

Krugman recently argued the Fed has already done enough to beat back inflation, as the impact of its hikes on housing demand and trade will relieve upward pressure on prices. He warned any further hikes would increase the risk of a painful recession.

The veteran economist has also pointed to a shrinking ratio of job vacancies to workers as evidence the US economy is "just at the beginning of a large Fed-induced cooling/contraction."

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