Back-to-back quarters of negative GDP growth in the first half of the year ignited a fierce debate about whether the U.S. economy had entered a recession, given other signs of resilient expansion.

• Tomorrow's initial release of Q3 GDP numbers is expected to show the opposite situation.

Why it matters: The headline of tomorrow's GDP report will likely be more upbeat, showing that the economy started growing in the July-to-September quarter. But this time, the underlying details may reveal an economy in worse shape.

• Under the hood, the numbers will likely contain further signs that the Federal Reserve's aggressive interest rate increases are taking a toll on the economy — even as price pressures haven't yet eased.

By the numbers: Forecasters expect the first release of third-quarter GDP to show that the economy grew at a 2.3% annualized pace. That would follow contractions of 1.6% and 0.6% in the first and second quarters, respectively.

• Growth last quarter is expected to get a big boost from trade dynamics, as imports fell off relative to exports. That's a positive in the arithmetic for GDP — though it also suggests domestic demand is slowing.
• At its peak in March, the trade deficit was $107 billion. By August, it had shrunk to $67 billion as imports slowed.

Other components of the report will show more sluggish activity —possibly in consumer spending which makes up a whopping 70% of economic activity, but also in areas of the economy most sensitive to changes in interest rates.

• One such area is housing — or residential fixed investment, in econ-speak. This component dragged down growth in the second quarter, subtracting 0.93 percentage points from the overall GDP. The last time housing was a bigger drag was the same period in 2020, during the height of the pandemic lockdown.
• Economists are penciling in an uglier figure for tomorrow's report. After all, much of the second quarter predated the most recent surge in mortgage rates that crushed home-buying demand and, in turn, the appetite to build.

Between the lines: While the report offers the most comprehensive checkup on economic health, it isn't expected to reveal anything fresh about the economy that would change the Fed's course.

What they're saying: A cooling economy is welcome news, but the Fed is "reacting to inflation right now, and this report will show no signs of easing there," says Samuel Coffin, an economist at UBS.

The bottom line: The headline GDP number might suggest the economy has bounced back from the doldrums of the first half of the year, which may be touted by some politicians. But the details could be more troubling.

The Bank of Canada was widely expected to raise interest rates by another 0.75 percentage points this morning — but instead surprised the markets with only a 0.5 percentage point hike.

• It could be an early sign of a global policy pivot, as central banks worldwide slow down their interest rate increases to allow more time to assess how rate hikes to date are rippling across the world economy.

Why it matters: International policymakers are starting to fear that they're oversteering in their efforts to tighten monetary policy and that the rate hikes already in place will cause a worldwide recession.

• This move, combined with the Reserve Bank of Australia earlier this month shifting down to a 0.25 percentage point hike, suggest major central banks are starting to slow their rolls.

What they're saying: "Economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy," the Canadian bank's policy committee said in a statement.

• It added that the Canadian housing market is retrenching, business and consumer spending has slowed, and export demand has softened.

What's next: The European Central Bank is set to meet tomorrow, and the Fed plans to meet next week. Both are expected to raise their policy rate by another 0.75 percentage point.

• But even assuming they stick with those plans rather than make a Canadian-style pivot, all eyes will be on press conferences from the two central banks' leaders for signs that the breakneck pace of rate increases will soon come to an end.