Q3 GDP estimates revised down to 4.9% growth pace
Today’s third and final release focused on Q3 GDP could be filed under “old news” and “good news.” Any focus on that period is largely an academic one, as investors and economists alike have shifted their focus toward 2024.
A fine-tuning of the data led to a moderate reduction in estimated growth in the U.S. economy during the third quarter to a 4.9% annualized pace. Even so, that rate remained more than double the pace of expansion in the first half of the year. The acceleration in growth illustrates a moderate resurgence in economic momentum during the quarter, although the headline number likely exaggerates the underlying strength of the economy.
Unsurprisingly, the relative strength of the consumer provided the critical underpinning to growth. Personal consumption expenditures grew at a solid 3.1% clip, lifted by a notable pickup in spending on goods that followed a lackluster second quarter. Spending on services also accelerated to 2.2%. Spending on personal residences also posted a solid gain despite the surge in mortgage interest rates. The increased ended a string of nine consecutive quarters of contraction in housing.
Changes in inventories, which can skew quarterly results either positively or negatively, generally wash out over time. In the third quarter, inventories accounted for nearly 1.3% of top-line growth — a notable boost that helped to offset inventory drawdowns earlier this year. For the second consecutive quarter, the balance of trade was neither a headwind nor a tailwind to growth.
Falling inflation has been a boon for consumers who have found a way to continue to grow their spending despite surging prices in recent years. Strong wage gains fueled by robust labor demand, ample access to credit, and a cash stockpile accumulated since 2020 have provided the cash needed for consumption to expand in recent years despite the dilutive effects of rising prices.
It appears that the pace of growth likely reached its near-term apex in Q3, with most forecasts calling for growth to slow in the final few months of the year. Looking to next year, questions remain about whether a soft landing is in the cards, but the Fed’s updated rate forecasts reinvigorated hopes that lower interest rates are coming into view, making the path to a soft landing a bit easier. A preemptive Fed pivot toward looser policy opens the door wider to the possibility that this Fed may yet succeed where many of its predecessors have failed — slowing the economy while reining in inflation rather than continuing to tighten into a hard landing.
Whether the Fed will ultimately be successful remains to be seen. It’s not a given, as policymakers still appear content to hold rates steady for some time before walking them back. Given the lagged impact of higher rates on the economy, the economy is still absorbing their effects and could slow further even in the absence of additional rate hikes. Policymakers are hesitant to move too swiftly to cut though, fearing the potential of reheating the labor market and providing unwanted accelerant that could cause inflation to reignite.
As Fed watchers listen for more clues about the timing of rate cuts, the tug of war between higher rates and consumer spending continues. The plausibility of the soft-landing scenario hinges on consumers’ continued willingness and ability to spend while inflation and interest rates recede over time. Thus far, that plan has largely worked, albeit with plenty of fine-tuning in Fed messaging in formal policy statements and between-meeting commentary from various Fed governors.
The bottom line: The Q3 surge in GDP probably overstated the real strength of the underlying economy, but once again demonstrated the resiliency of consumers. Looking ahead, the path toward either a soft landing or recession in 2024 will likely depend on the same.
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