The U.S. economy grew even faster than expected in the third quarter, buoyed by strong consumer spending despite higher interest rates, persistent inflationary pressures and a host of other domestic and global headwinds.
Gross domestic product, a measure of all goods and services produced in the U.S., rose a seasonally adjusted 4.9% annualized rate in the July-September period, compared with a flat 2.1% pace in the second quarter, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had expected real GDP to accelerate by 4.7%, which is also adjusted for inflation.
The sharp increase was due to contributions from consumer spending, increased inventories, exports, housing investment and government spending.
Consumer spending, measured by personal consumption expenditures, rose 4% in the quarter, after rising just 0.8% in the second quarter, and accounted for 2.7 percentage points of the total GDP increase. Inventories contributed 1.3 percentage points. Gross private domestic investment increased by 8.4% and government spending and investment increased by 4.6%.
Spending at the consumer level is fairly evenly split between goods and services, with the two metrics increasing by 4.8% and 3.6%, respectively.
The GDP increase marked the largest increase since the fourth quarter of 2021.
Markets had little reaction to the news, with stock prices mixed in early trading and Treasury yields mostly lower.
“This report confirmed what we already knew: the consumer went on a spending spree in the third quarter,” said Michael Arone, chief investment strategist for US SPDR Business at State Street Global Advisors. “I don’t think anything in this report changes the outlook for monetary policy. So I don’t think you’re seeing an overreaction from the markets.”
While the Federal Reserve’s report could provide some impetus for tighter monetary policy, traders were still not counting on a rate hike at next week’s central bank meeting, according to CME Group. Futures prices suggested there was only a 27% chance of a rise at the December meeting following the GDP release.
“Investors shouldn’t be surprised that consumers were on a spending spree in the final months of summer,” said Jeffrey Roach, chief economist at LPL Financial. “The real question is whether the trend can continue in the coming quarters, and we believe this is not the case.”
In other economic news, the Labor Department reported Thursday that jobless claims totaled 210,000 in the week ended Oct. 21, up 10,000 from the previous period and slightly above the Dow Jones estimate of 207,000.
Durable goods orders also rose 4.7% in September, well above the 0.1% gain in August and the 2% forecast, according to the Commerce Department. Orders for durable goods, which include home appliances, aircraft and electronics, posted the largest increase since July 2020.
At a time when many economists expected the U.S. to be in the midst of at least a mild recession, growth kept pace thanks to consumer spending that exceeded expectations. The consumer accounted for about 68% of GDP in the third quarter.
While the U.S. has proven resilient to various challenges, most economists expect growth to slow significantly in the coming months. However, they generally believe that the US can avoid a recession barring further unforeseen shocks.
“Going forward, consumers will no longer spend at the same rate, the government will no longer spend at the same rate, and companies also appear to be slowing down their spending,” Arone said. “This suggests that this could be the highest GDP reading for at least the next few quarters.”
Even as coronavirus-era government transfer payments end, spending remains high as households dip into their savings and top up their credit card balances. The personal savings rate fell to 3.8% in the third quarter, compared to 5.2% in the previous period. Also, real profit after tax fell 1% in the quarter after rising 3.5% in the second quarter.
The GDP gains also come despite the Federal Reserve not only raising interest rates at the fastest pace since the early 1980s, but also promising to keep rates high until inflation returns to acceptable levels. The price increases were well above the central bank’s annual target of 2%, although the inflation rate has at least fallen in recent months.
The chain-weighted price index, which takes into account changes in consumer shopping habits to measure inflation, rose 3.5% in the quarter, up from 1.7% in the second quarter and above the Dow Jones estimate of 2.5%.
“The Federal Reserve’s bottom line is that there is no recession in sight and policymakers can take comfort in the knowledge that they can keep interest rates higher for longer without triggering a collapse in the U.S. economy,” said Matthew Ryan, head of the Federal Reserve Federal Reserve Market Strategy at Ebury, a global financial services company. “We don’t think this impressive GDP data will be enough to encourage the Fed to raise rates again, although we at least believe the first rate cut is still some way off.”
In addition to interest rates and inflation, consumers face a host of other issues.
The resumption of student loan payments is expected to weigh on household budgets, while elevated gasoline prices and a shaky stock market weigh on confidence. Geopolitical tensions are also a potential headache, with fighting between Israel and Hamas and the war in Ukraine bringing significant uncertainty about the future.
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Source : www.cnbc.com