Strong Q3 Growth Despite Challenges
The US economy experienced stronger-than-expected growth in the third quarter, driven by businesses expanding warehouse space and investing in new machinery. This impressive pace of growth, the fastest in nearly two years, may have painted an overly optimistic picture of the economy’s health. Despite higher borrowing costs slowing hiring and spending, the Commerce Department’s report on Wednesday indicated that the economy continues to expand amid ongoing recession fears since late 2022.
“There are no signs of economic downturn in today’s report, but growth is definitely slowing,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The economy is losing some momentum as we move into the final quarter of the year.”
Revised GDP Growth and Economic Indicators
Gross domestic product (GDP) rose at an annualized rate of 5.2% last quarter, an upward revision from the initially reported 4.9%, according to the Commerce Department’s Bureau of Economic Analysis (BEA). This marks the fastest expansion since the fourth quarter of 2021. Economists surveyed by Reuters had anticipated a revision to a 5.0% growth rate, reflecting a significant boost from the previous 2.1% growth in the April-June quarter, and well above the Federal Reserve’s estimated non-inflationary growth rate of around 1.8%.
The upward revision was mainly due to increased business investments in structures such as warehouses and healthcare facilities, along with higher spending by state and local governments. Residential investment also saw a boost, ending nine consecutive quarters of contraction, thanks to increased construction of single-family homes. Private inventory investment exceeded previous estimates, with wholesalers accumulating more machinery and equipment, contributing 1.40 percentage points to GDP growth, compared to the 1.32 points estimated last month.
Consumer Spending and Future Outlook
However, growth in consumer spending, which constitutes over two-thirds of US economic activity, was revised down to a still-solid 3.6% from the previously estimated 4.0%. This downgrade is attributed to reduced spending on financial services, insurance, and used light trucks, likely impacted by shortages caused by the recent United Auto Workers strike. Despite these adjustments, consumer spending remains a key driver of the economy’s overall growth.
As we look ahead, the cooling momentum suggests that the US economy may face challenges in sustaining this growth rate. Higher borrowing costs and ongoing uncertainties could continue to impact hiring and spending. Nonetheless, the strong third-quarter performance provides a buffer against immediate recession fears, indicating resilience in various sectors of the economy.