In the third quarter, the U.S. economy expanded by nearly 5%, surprising many who had predicted a recession. This growth was driven by several factors. First, the tight job market led to higher wages, which, in turn, boosted consumer spending. Additionally, businesses increased their stockpiles to meet strong demand, contributing to the growth.
The Commerce Department’s Bureau of Economic Analysis reported that this was the fastest economic growth rate in almost two years. One noteworthy aspect of this growth was the rebound in residential investment, which had been declining for nine consecutive quarters.
Government spending also increased during this period. However, business investment saw a dip for the first time in two years. This drop was mainly due to reduced spending on equipment such as computers. Furthermore, the initial boost from the construction of semiconductor manufacturing facilities, part of President Joe Biden’s initiative to promote domestic semiconductor production, began to fade.
While the impressive economic performance during the summer is unlikely to be a long-term trend, it did demonstrate the economy’s strength, even in the face of the Federal Reserve’s aggressive interest rate hikes. However, there are factors that could slow down growth in the fourth quarter. These include strikes by the United Auto Workers, the resumption of student loan repayments by millions of Americans, and the delayed impact of the rate increases.
The report also revealed a significant decrease in underlying inflation in the last quarter. Many economists have adjusted their predictions and now believe that the Fed can guide the economy to a “soft landing.” They base this expectation on the idea that the strength seen in the second quarter, particularly in worker productivity, will continue into the July-September period, along with a decrease in unit labor costs.
Brian Bethune, an economics professor at Boston College, noted, “For some time now, there has been a pessimistic view regarding an imminent recession and persistent inflation due to the post-pandemic situation. However, not only has the economy shown remarkable resilience, but we’ve also experienced productivity-driven growth for two consecutive quarters in 2023, indicating that the overall health of the business cycle remains robust.”
In the last quarter, the country’s total economic output, or Gross Domestic Product (GDP), increased at a rapid annualized rate of 4.9%. This was the fastest growth rate since the end of 2021, surpassing the expectations of economists who had predicted a 4.3% increase. To put this in perspective, in the April-June quarter, the economy had grown at a slower pace of 2.1%, and this recent growth rate is significantly higher than what Federal Reserve officials consider a sustainable, non-inflationary growth rate of about 1.8%.
The boost in economic growth was mainly driven by consumer spending, which makes up more than two-thirds of all economic activity in the United States. Consumer spending picked up speed, increasing at a rate of 4.0% in the last quarter, compared to a sluggish 0.8% in the previous quarter. This increased spending contributed significantly to the GDP growth, accounting for 2.69 percentage points of the overall increase. Both spending on goods and services played a role in this growth.
Even though the growth in wages has decelerated a bit, it’s still outpacing the rate of inflation, which means that households have more purchasing power.
However, the increase in wages during the last quarter was somewhat offset by higher personal taxes, causing the income available to households after taxes to decline by 1.0%. This reduction in disposable income prompted consumers to dip into their savings to support their spending, resulting in a drop in the savings rate from 5.2% in the second quarter to 3.8%.
As a result of these economic developments, stocks on Wall Street experienced a decline. Meanwhile, the U.S. dollar strengthened against various other currencies, and yields on U.S. Treasury bonds decreased.
Anticipating a Slowdown
The declining rate at which people are saving their money, along with the return of student loan repayments in October, is expected to have an impact on spending. Economists believe these loan repayments amount to approximately $70 billion, which is about 0.3% of the money people have available for personal expenses. This could put a damper on consumer spending. Furthermore, individuals with lower incomes are increasingly resorting to borrowing to make their purchases, and the rising interest rates are causing more people to miss their credit card payments.
Economists predict that the extra money saved during the COVID-19 pandemic is mostly held by wealthier households and will likely be depleted by the first quarter of 2024. Some economists are concerned that a significant economic slowdown may be on the horizon. This concern is shared by United Parcel Service (UPS.N), which recently lowered its revenue forecast for 2023 for the second time in a row
However, not everyone is overly concerned. Some argue that consumer spending wasn’t primarily driven by credit but instead by a strong job market and government support provided during the pandemic.
Chris Low, the chief economist at FHN Financial in New York, suggests that it’s premature to assume slower economic growth, particularly after three consecutive quarters of consistently better-than-expected economic performance. He believes that economists who are revising their estimates regarding when pandemic-related savings will run out should reconsider their approach and focus on understanding what has kept consumer spending so strong. He emphasizes that borrowing isn’t the sole factor driving this strength.
A separate report from the Labor Department emphasizes the resilience of the job market. It reveals that initial claims for state unemployment benefits increased by 10,000 to 210,000 during the week ending October 21, which is still within the lower end of the range observed throughout this year, ranging from 194,000 to 265,000.
Additionally, the number of people receiving benefits after the first week of assistance, which serves as a measure of hiring activity, went up by 63,000 to 1.790 million for the week ending October 14. This figure is the highest it has been since early May. Economists have different opinions on whether this reflects longer periods of unemployment for those who are jobless or difficulties in accounting for seasonal variations in the data.
During the last quarter, businesses increased their inventories by a total of $80.6 billion, and this added 1.32 percentage points to the overall economic growth (GDP). To restock their supplies, many businesses relied on imports, which led to a minor trade deficit that slightly pulled down the GDP growth. If we exclude the impact of inventories and trade, the economy still managed to grow at a healthy rate of 3.5%.
It’s important to note that the recent GDP data is unlikely to affect immediate decisions on monetary policy. This is because U.S. Treasury yields have been surging, and there has been a recent drop in the stock market, both of which have tightened financial conditions.
Furthermore, there has been a decrease in the underlying pressures on prices. The price index for personal consumption expenditures (PCE), excluding food and energy, rose at a rate of 2.4%. This is the slowest increase since the fourth quarter of 2020 and follows a faster rate of 3.7% in the second quarter.
The core PCE price index is a measure of inflation that the Federal Reserve (the U.S. central bank) watches closely to achieve its 2% target inflation rate. The Fed is expected to keep interest rates the same in its upcoming meeting next Wednesday. Since March of the previous year, the Fed has increased its benchmark overnight interest rate by 525 basis points, bringing it to the current range of 5.25% to 5.50%.
According to Richard de Chazal, a macro analyst at William Blair in London, this data doesn’t provide much reason for the Fed to consider lowering interest rates at the moment. It also doesn’t suggest an immediate need for further rate increases.
