The US economy is doing even better than the government thought

Drawing on the higher interest rates, U.S. consumers spent enough to help propel the economy to a brisk 5.2% annual pace from July to September, the Bureau of Economic Analysis reported Wednesday in an upgrade from its previous estimate.

The government had previously estimated that the economy grew by 4.9% annually last quarter.

Wednesday’s second estimate of growth for the July-September quarter confirmed that the economy accelerated sharply from its 2.1% in April to June. It showed that U.S. gross domestic product — the total output of goods and services — grew at its fastest quarterly rate in nearly two years.

The increase in the third quarter primarily reflected increases in consumer spending and inventory investments.

Consumer spending, the lifeblood of the economy, rose 3.6% annually from July to September – still healthy but down from the previous estimate of 4%. Private investment rose at a 10.5% annual pace, including a 6.2% increase in housing investment, defying higher mortgage rates.

The economy also got a boost from businesses building inventories in anticipation of future sales, adding 1.4 percentage points to quarterly growth. The growth in the third quarter was also an increase in spending and investment by governments at all levels – federal, state and local.

Americans expected to increase spending this holiday season


The US economy, the world’s largest, has proved resilient even as the Federal Reserve has raised its benchmark interest rate 11 times since March 2022 to combat the worst bout of inflation in four decades. These higher interest rates have significantly increased consumer and business borrowing costs. But they have also helped ease inflationary pressures: Consumer prices rose 3.2% last month from 12 months earlier, a marked improvement from the 9.1% year-on-year inflation recorded in June 2022.

“In light of the positive economic background, we believe that the market will rise until the end of the year and that we should have a good start to 2024 – the exact opposite of what many believed as recently as this summer, ” Chris Zaccarelli, Chief Investment Officer of the Independent Advisor Alliance, said in an email.

Possible soft landing, mild recession

The US labor market is cooling off from the red-hot levels of the past two years. But that’s still healthy by historical standards: Employers are adding an average of 239,000 jobs per month this year. And the unemployment rate has fallen below 4% for 21 consecutive months, the longest such streak since the 1960s.

The combination of easing inflation and robust hiring has raised hopes that the Fed can pull off a so-called soft landing — raising interest rates just enough to cool the economy and tame price increases without tipping the economy into recession.

“We continue to forecast an ongoing expansion in economic activity, but the pace is expected to slow quite significantly in Q4,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “We expect a slowdown in household spending, not only on repayments for an unusually strong third quarter, but also from the cumulative effects of monetary policy tightening.”

What the Fed Rate Break Means for Americans


Gus Faucher, chief economist at PNC, goes one step further to predict a brief recession in the coming year.

“PNC expects a recession starting in mid-2024 as drag from tight monetary policy continues to rise. But the recession should be short and mild, thanks to strong consumer balance sheets and a tight labor market that will discourage layoffs,” he said .

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