U.S. consumers powered the economy to its best quarterly growth rate in nearly two years, as elevated spending on goods and services fueled a remarkable expansion, notwithstanding rising interest rates and high prices.
The U.S. economy grew at a 4.9% annual rate in the third quarter, the Commerce Department reported Thursday, marking a steep acceleration from the second quarter’s 2.1% growth rate. In addition to consumer spending, an increase in residential construction and continued strength in government investment both contributed to what was the strongest quarter for growth since late 2021.
The third-quarter figure far surpassed economists’ consensus expectations for 3.8% growth and reflected just how strong the economy remained through September, even as financial conditions tightened and bond yields climbed above 5%. The data suggest an economic recession isn’t imminent, given the broad-based nature of the expansion and the resilience of American consumers.
But economic headwinds are increasing, and most forecasts suggest growth has slowed in recent weeks. The latest data on gross domestic product likely reflected a handful of idiosyncratic factors that won’t contribute as much growth in the future, economists say. As a result, the third-quarter GDP reading is likely to keep the Federal Reserve on track to hold interest rates steady when officials gather next week for their November policy meeting.
“The real question is if the [spending] trend can continue in the coming quarters,” wrote Jeffrey Roach, chief economist with LPL Financial. “We think not.”
Nearly every component of GDP contributed positively in the third quarter, the data show. Residential investment rose at a 3.9% pace, marking the first positive contribution from that category since the first quarter of 2021. Government investment grew at a 4.6% rate, up from 3.3% in the second quarter, and exports expanded by 6.2% after contracting by 9.3% earlier in the year.
The only component that detracted from the headline GDP number was imports, which count as a subtraction in the calculation of GDP and rose over the quarter. Most economists view that as a positive, however, because it reflects the strength of American consumers as they purchase foreign goods and travel abroad.
Consumer spending increased at a 4% annual pace and contributed more than half of the quarter’s overall expansion, as Roach noted. That marked a dramatic acceleration from the previous quarter’s 0.8% pace, and was the fastest growth rate for the category since mid-2021. Households splurged on everything from housing and healthcare to travel and dining out.
“The revenge spending of the consumer was in full evidence with solid spending in services,” wrote Richard de Chazal, a macro analyst with William Blair.
It is unlikely consumers will be able to maintain that level of spending, however, which is why growth is expected to slow in the coming months. For one, while incomes rose in the third quarter, more households are now running down savings and spending more on debt payments. The personal saving rate fell in the third quarter to 3.8%, from 5.2% in the second quarter, Thursday’s release showed.
The depletion of excess savings, alongside mild weakening in the labor market and tighter credit conditions, should all contribute to some slowing in consumer spending in the coming quarters, de Chazal wrote.
In addition, many third-quarter purchases likely were one-off expenditures for tickets to events such as Taylor Swift and Beyoncé concerts, or the Barbie and Oppenheimer movies, Gregory Daco, chief economist with EY-Parthenon, told Barron’s before the data were released.
“They are typical examples of spending that isn’t renewed,” he says. “So you actually get a negative contribution to growth in the following quarter because spending doesn’t occur.”
Other economic challenges are piling up: Geopolitical tensions could dampen demand, and businesses are growing wary of further investment. And the Fed’s efforts to slow the economy are beginning to have an impact.
Fed officials have made clear they are proceeding cautiously in their inflation-fighting efforts, because of both the backward-looking nature of economic data and the length of time it takes for the impact of interest-rate hikes to show up in the economy. That approach means that even the third-quarter GDP number is unlikely to sway them from the telegraphed path of holding interest rates steady at the current level of 5.25% to 5.5% when officials next meet on Oct. 31-Nov. 1.
Indeed, investors were still pricing in after the GDP release a more-than-98% chance that the Fed would hold the federal funds rate steady at next week’s meeting, the CME FedWatch tool showed.
“Policymakers had anticipated the strength exhibited in today’s report based on strong monthly data, with little of the underlying details coming as much of a surprise,”
Wells Fargo
economists Tim Quinlan and Shannon Seery wrote. “We also ultimately still anticipate the economy will show more meaningful signs of slowing later this year and early next year as tighter financial conditions more meaningfully materialize and begin to weigh on spending and investment decisions.”
Fed officials had penciled in one more interest-rate hike this year, which could still come at the central bank’s December meeting. It is too soon for the Fed to rule out a December rate increase, as officials will want to evaluate coming data.
But the Fed likely will want to see an economic acceleration before raising rates again, especially because financial conditions are already growing more restrictive.
The expected slowdown in consumer spending, combined with cooling wage growth and rising global tensions, could keep the Fed on hold despite a strong third quarter. Investors were pricing in a roughly 20% chance on Thursday of a quarter-point hike in the fed funds rate in December, according to the FedWatch tool—a roughly nine-percentage-point decline from the day before the data were released.
Thursday’s data release was the advance estimate for GDP. It will be revised twice in the coming months as more data become available.
Write to Megan Cassella at [email protected]
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