First, the bottom line
• The U.S. economy continues to grow at a solid clip, supported by strong goods consumption and defense spending. Service providers have been the primary beneficiary of household spending in recent years, with goods retailers taking a back seat. After an extended dry spell, that appears to have changed.
• The fact that growth has been sustained and momentum remains solidly positive speaks to the resiliency of the U.S. consumer, who’s pushed through rising prices, higher interest rates, and recession fears over the past few years to power the nation’s economy forward.
The numbers: No slowdown in Q3
• Growth estimates for the economy were unchanged from the advance estimate released last month. The economy grew at a solid 2.8% clip for the quarter, coming in within the range of 2.7–3.3% forecast by economists.
• Consumption was once again the primary driver of growth, posting a strong 3.5% advance, led by a continued surge in goods spending.
• Strong consumer spending wasn’t limited to domestically produced goods, as a 10.2% increase in imports more than offset solid export gains, widening the trade deficit, which in turn trimmed an estimated 0.6 percentage points from headline growth.
• Federal defense spending grew by 13.9% annualized in the third quarter, a sharp expansion of spending largely reflective of ongoing aid supplied to Ukraine and the need to replenish American military stockpiles.
• Housing remains under pressure, as potential homebuyers continue to feel the effect of the spike in home prices nationally since 2020 and higher mortgage rates. Despite the Fed’s recent move to start cutting rates, housing was a drag on growth for the second consecutive quarter.
Despite dual risks, consumers persisted
• Growth slowed modestly from the second quarter, but was still quite robust, clocking in well above estimates of long-term trend growth for the United States of 1.5–2.0%.
• The resilience of the U.S. economy has been an anchor for the global economy, particularly among other major developed countries that have languished by comparison. Estimates from the International Monetary Fund suggest growth in the Euro area and United Kingdom will be closer to 1% for 2024, with Japan barely eking out any growth at about 0.3%.
• Falling inflation and the Fed’s tilt toward rate cuts have helped to bolster the collective mood of consumers, while a solid jobs market provides a critical source of fuel to spend.
• That’s not to suggest that everything is rosy. Inflation has slowed considerably, but high prices remain a challenge and source of frustration for consumers — a fact made clear by frustrated voters earlier this month.
• Further, the labor market has slowed considerably from its recent go-go days. Unemployment has risen, as the pace of job creation has slowed and the number of job openings has fallen. There’s less mobility in the labor market, but layoffs also haven’t risen considerably — a key psychological underpinning for household spending.
• Fewer workers are jumping ship for better pay, but there also isn’t widespread fear of job losses that would cause consumers to think twice about spending.
• The result is an economy that, for now at least, remains on a solid footing, having maintained positive momentum. Consumers have persisted in spending, battling through an extended period of rising prices and recession fears that have proven thus far to be unfounded, despite a host of historically reliable data that suggested otherwise.
For the Fed
• The Fed’s December decision is rapidly approaching, but with few new insights since the first estimate, today’s GDP report isn’t likely to move the needle considerably as policymakers weigh their next move and the ones that will follow.
• The November jobs report will matter much more, as will the November CPI report that will be released shortly before policymakers gather at the December FOMC meeting. Both should provide important signals about the greater risk to the Fed’s dual mandate and could help to nudge rate expectations for the coming year higher than previously projected.
• The fact that inflation is proving to be increasingly sticky above the Fed’s stated 2% target is one potential concern. A second is the recognition that the pace of economic growth remains solid and, as Fed Chair Jerome Powell has noted, may be stronger next year.
• Tack on the policy ambiguity around trade and tariffs and their potentially inflationary effect, and Fed policymakers will have plenty to think about as they refine their economic and interest rate projections for 2025 and beyond.
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