GDP growth surged in the third quarter
Today’s GDP report reconfirmed that the economy surged in the third quarter — no news there. With more data and analysis though, it’s become clear that it accelerated at a pace that was moderately stronger than previously believed.
A convergence of factors lifted GDP at a 5.2% annualized rate in the third quarter. Consumers opened their wallets and purses to spend, housing provided a boost for the first time in two-and-a-half years, businesses restocked inventory, and government spending edged higher, which all contributed to the pickup in activity.
But to borrow from a well-worn investment maxim, past momentum doesn’t guarantee future results. Just as the convergence of various catalysts drove the Q3 advance, multiple factors appear poised to push back against growth in the coming year.
Headlining today’s report from the Commerce Department was robust consumer spending. Personal consumption expenditures grew at a brisk 3.6% pace in Q3, very near the strongest quarterly advance since 2021. Consumer spending accelerated for both goods and services — a broad-based gain that occurred despite relatively weak gauges of consumer sentiment during the period.
Consumption was fueled by strong labor markets, solid wage gains, and a sizable — albeit shrinking — stockpile of cash held by households. Further easing in inflation pressures encouraged a growing sense of relief that the worst broad-based price surge in decades was fading. While a considerable contributor, consumption growth still only accounted for a bit less than half of the quarterly advance.
Residential investment showed signs of emerging from its doldrums, growing by 6.2%. That increase snapped a string of nine consecutive quarters of contraction in housing investment dating back to Q2 2021. Housing is a small piece of the overall economy — accounting for about 3% of GDP — but one that can provide important clues about changes in consumer attitudes. Housing affordability has been hammered in recent years as building costs and existing home prices surged at the same time mortgage interest rates soared, making any evidence of stability in the housing sector a positive.
Growth in business inventories tacked 1.4 percentage points onto top-line growth, marking its first positive contribution this year. Government spending at the local, state, and federal level also added nearly 1.0 percentage point to quarterly growth.
The real question at this point isn’t what drove growth in Q3, but what will drive it looking toward next year. It’s clear that the Fed’s efforts to tighten conditions have been felt to a degree, but the lagged effect of both higher interest rates and the withdrawal of liquidity are expected to continue to bite in the coming quarters.
Bank lending standards have tightened — a new reality for both consumers and businesses looking to borrow. That’s expected to create a further headwind to growth in the coming quarters, even as the monetary policy debate shifts to how soon and how much the Fed might cut policy rates as inflation subsides. With credit tougher to come by, business investment and consumer spending on higher-ticket items are expected to slow in the coming quarters.
That leaves the window of recession vulnerability open for 2024. Can this unconventional expansion persist for longer than leading indicators would suggest? Perhaps — just as it’s possible the Fed could reverse course in time to provide timely support for a slowing economy before it stalls completely. The answers to both questions remain to be seen. In the meantime, the negative posture of a range of leading indicators continue to suggest that a soft landing shouldn’t be viewed as a lock.
The bottom line? Growth accelerated in Q3, lifted by a timely convergence of stronger consumption, business investment, and government spending. Can it continue into 2024? That’s the more meaningful question for investors, and one that looks increasingly doubtful.
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