“The US economy defies expectations as it delivers a jaw-dropping performance in the third quarter, showcasing resilience and sparking hope for a strong economic recovery amidst turbulent times.”
The U.S. economy grew at a rate of 4.9% in the third quarter, surpassing expectations and defying concerns of a recession. Consumer spending played a significant role in driving this growth, supported by higher wages resulting from a tight labor market. Additionally, businesses restocked their inventories to meet the strong demand, contributing to the robust GDP growth.
Government spending also increased during this period. However, business investment experienced a decline for the first time in two years, primarily due to reduced spending on equipment like computers. The boost from the construction of factories related to President Joe Biden’s semiconductor manufacturing campaign also faded.
While the strong performance in the third quarter is unlikely to be sustainable, it demonstrates the resilience of the economy despite aggressive interest rate increases from the Federal Reserve. Growth may slow in the fourth quarter due to factors such as United Auto Workers strikes, the resumption of student loan repayments, and the lagged effects of rate hikes.
The report also showed a considerable decrease in underlying inflation last quarter. Most economists now believe that the Fed can achieve a “soft-landing” for the economy, expecting a continuation of the second-quarter strength in worker productivity and a moderation in unit labor costs.
Consumer spending, which accounts for a significant portion of U.S. economic activity, experienced accelerated growth at a rate of 4.0% in the third quarter. This increase in spending on both goods and services contributed 2.69 percentage points to GDP growth.
Although wage growth has slowed, it is still outpacing inflation, leading to increased purchasing power for households. However, the rise in personal taxes resulted in a 1.0% decline in income available to households after taxes. As a result, consumers tapped into their savings to fund their spending, leading to a decrease in the saving rate from 5.2% to 3.8%.
While the economy’s performance has been impressive, some concerns remain. The declining saving rate, combined with the resumption of student loan repayments, could potentially impact spending. Economists estimate that the excess savings accumulated during the pandemic will mostly run out by the first quarter of 2024, potentially leading to a slowdown. However, others argue that spending has not relied on credit but rather the strong labor market and government transfers during the pandemic.
The labor market has shown resilience, as initial claims for state unemployment benefits remain at the low end of their range. However, the number of people receiving benefits after an initial week of aid, which serves as a proxy for hiring, has increased, indicating longer spells of joblessness or difficulties in adjusting the data for seasonal fluctuations.
Inventory accumulation also played a role in GDP growth, rising at a pace of $80.6 billion last quarter. Businesses relied on imports to restock, resulting in a small trade deficit that had a minor drag on GDP growth. Excluding inventories and trade, the economy grew at a solid 3.5% rate.
The GDP data is not expected to have an immediate impact on monetary policy, given the recent surge in U.S. Treasury yields and stock market selloff that have tightened financial conditions. Underlying price pressures have further abated, with the core PCE price index rising at a slower pace. The Federal Reserve is anticipated to keep interest rates unchanged in their upcoming meeting.
Overall, while the U.S. economy showcased strong growth in the third quarter, concerns about a potential slowdown in the future remain. However, the economy’s resilience, coupled with positive labor market indicators, suggests that the business cycle remains solid.