The U.S. economy demonstrated remarkable resilience in the third quarter, surpassing expectations for growth. Despite facing challenges like higher interest rates, persistent inflation, and various domestic and global headwinds, the economy showed robust performance.
According to the Commerce Department’s report, the Gross Domestic Product (GDP), which measures the total value of goods and services produced in the U.S., surged at an annualized rate of 4.9% from July to September. This marked a significant uptick from the previously reported 2.1% growth in the second quarter, surpassing economists’ projected acceleration of 4.7%.
This substantial growth was driven by various factors, including robust consumer spending, increased inventories, strong exports, higher residential investment, and elevated government spending.
Consumer spending, as measured by personal consumption expenditures, saw a notable increase of 4% in the quarter, a substantial improvement from the 0.8% rise in the previous quarter. Gross private domestic investment also showed a surge of 8.4%, while government spending and investment recorded a substantial jump of 4.6%.
Consumer spending was evenly distributed between goods and services, with both categories experiencing growth of 4.8% and 3.6% respectively.
This surge in GDP marks the most significant gain since the fourth quarter of 2021. Interestingly, market reactions to this news were relatively muted, with stock market futures showing a negative trend and Treasury yields mostly declining.
While this report might give the Federal Reserve cause to consider maintaining a tight monetary policy, traders were still pricing in low odds of an interest rate hike in the upcoming central bank meeting. Futures indicated only a 27% likelihood of an increase at the December meeting following the GDP release.
While the strong consumer spending in the final summer months is not surprising, the question remains whether this trend can be sustained in the upcoming quarters. Some analysts are skeptical about the continuity of this trend.
Despite expectations of a possible recession, the U.S. has managed to maintain steady growth, primarily due to consumer spending surpassing all forecasts. Consumer spending accounted for about 68% of GDP in Q3.
Even with the conclusion of Covid-era government transfer payments, spending has remained robust as households dip into savings and increase credit card usage.
This growth has persisted despite the Federal Reserve’s aggressive rate hikes, the most rapid since the early 1980s, and their commitment to maintaining high rates until inflation moderates. Price hikes have consistently exceeded the central bank’s target of 2% annual inflation, though the rate has somewhat eased in recent months.
The chain-weighted price index, which considers shifts in consumer spending habits to measure inflation, saw an increase of 3.5% in the quarter, up from 1.7% in Q2, surpassing the Dow Jones estimate of 2.5%.
In addition to interest rates and inflation, consumers are contending with various other challenges. The resumption of student loan payments is expected to impact household budgets, and elevated gas prices and a volatile stock market are affecting consumer confidence. Geopolitical tensions, such as conflicts in Israel and Ukraine, also present uncertainties.
While the U.S. has demonstrated resilience in the face of these challenges, most economists anticipate a considerable slowdown in growth in the coming months. However, they generally believe the U.S. can avoid a recession barring any unforeseen shocks.