July 11, 2024

Surprise Soars: U.S. Economy Defies Odds with a 4.9% GDP Surge in Q3

Image Credits: CNBC/U.S. Bureau of Economic Analysis

In a stunning turn of events, the U.S. economy experienced a robust surge in the third quarter, outpacing all expectations despite higher interest rates, persistent inflationary pressures, and numerous global and domestic challenges.

Gross domestic product (GDP), the barometer of all goods and services produced in the U.S., accelerated at an impressive 4.9% annualized rate from July through September. This significant jump, up from a previously reported 2.1% in the second quarter, surprised economists anticipating a 4.7% growth in real GDP.

The driving force behind this economic feat was a remarkable blend of factors, including a resurgence in consumer spending, a boost in inventories, thriving exports, a revival in residential investment, and increased government spending.

Consumer spending, measured by personal consumption expenditures, surged by 4% during the quarter, a substantial improvement from the modest 0.8% increase in the second quarter. This contributed a noteworthy 2.7 percentage points to the overall GDP growth. Additionally, inventories played a significant role, contributing 1.3 percentage points to the GDP increase. Gross private domestic investment also saw a remarkable increase of 8.4%, while government spending and investment jumped by 4.6%.

Consumer spending was well-distributed between goods and services, with both categories showing healthy growth rates of 4.8% and 3.6%, respectively.

This GDP surge is the most significant growth since the fourth quarter of 2021, and it left many wondering how financial markets would react. Surprisingly, market reactions were subdued, with mixed stock performance in early trading and mostly lower Treasury yields.

Michael Arone, Chief Investment Strategist for U.S. SPDR Business at State Street Global Advisors, commented, “This report confirmed what we already knew: The consumer went on a shopping spree in the third quarter. I don’t think anything in this report changes the outlook for monetary policy. That’s why I don’t think you’re seeing an overreaction from markets.”

While this remarkable report might motivate the Federal Reserve to maintain tight monetary policies, traders were still pricing in no chance of an interest rate hike at the upcoming central bank meeting. Futures suggested only a 27% probability of an increase following the GDP release in December.

Jeffrey Roach, Chief Economist at LPL Financial, emphasized that the real question is whether this trend of high consumer spending can persist in the coming quarters.

The U.S. economy’s resilience to various challenges has been remarkable. However, most economists predict a considerable slowdown in growth in the coming months. The U.S. may avoid a recession, but the pace of growth is expected to decelerate. Michael Arone added, “This suggests this might be the peak GDP figure, at least in the next few quarters.”

Despite ending Covid-era government transfer payments, spending has remained robust as households draw down savings and increase credit card balances. The personal saving rate dropped to 3.8% in the third quarter from 5.2% in the previous period. Also, real after-tax income fell by 1% in the quarter after a 3.5% increase in Q2.

The impressive GDP gains occurred despite the Federal Reserve raising rates at the fastest pace since the early 1980s and their commitment to keeping rates elevated until inflation levels return to acceptable ranges. Inflation has consistently exceeded the central bank’s 2% annual target, although the inflation rate has eased somewhat in recent months.

The chain-weighted price index, which considers changes in consumer spending patterns to measure inflation, rose by 3.5% for the quarter, significantly higher than the Dow Jones estimate of 2.5%.

Matthew Ryan, Head of Market Strategy at Ebury, a global financial services firm, summarized the situation, saying, “The bottom line for the Federal Reserve is that no recession is in sight, and policymakers can be content in the knowledge that they can keep interest rates higher for longer, without triggering a meltdown in the U.S. economy. We don’t think that this impressive GDP data will be enough to encourage the Fed to deliver another rate increase, though we do at least believe that the first cut is a long way off.”

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