December 1, 2023

Brighton Journal

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US economic growth accelerated to 4.9% in the third quarter

US economic growth accelerated to 4.9% in the third quarter

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The U.S. economy expanded faster than expected in the third quarter, growing at its fastest pace in nearly two years in the latest sign of the country’s economic resilience despite high interest rates.

Strong consumer spending was the main driver of a 4.9 percent annual increase in gross domestic product, according to preliminary numbers from the Commerce Department’s Bureau of Economic Analysis.

That was a jump from a rate of 2.1 percent in the second quarter, the strongest number since the fourth quarter of 2021. Economists on average expected a rate of 4.3 percent.

Many economists said that while they expect growth to slow from a robust pace in the third quarter, the overall outlook remains strong.

“The basic story is a resilient consumer supported by a strong labor market,” said Eric Winograd, director of advanced market economics research at AllianceBernstein. “As long as the consumer remains strong, the economy as a whole will remain so.”

Consumer spending rose at an annual rate of 4 percent, up from just 0.8 percent in the second quarter, with strong growth in the goods and services sectors.

Business spending on inventories, which tends to be volatile, also provided a big boost in the third quarter and is likely to decline in the fourth quarter.

“Inventories are setting a high ceiling that will be difficult to exceed, and with student loan payments resuming, it would be shocking if we see this kind of growth sustained in the future,” said Tom Simons, an economist at Jefferies. Payment deferrals for student borrowers expired this month.

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This data comes as the Federal Reserve prepares for a meeting next week to set interest rates. The central bank is trying to use higher interest rates to bring inflation back toward its 2 percent target without causing a sharp deterioration in the economy.

GDP figures are unlikely to significantly influence next week’s decision, as they look reactionary compared to monthly data such as inflation and payrolls.

The Fed is widely expected to keep interest rates steady at their highest level in 22 years, to give policymakers more time to evaluate the impact of their previous rate hikes and recent events such as sharp sell-offs in bond markets.

However, the growth data provides another reminder of the economy’s long-term strength and supports expectations that interest rates will remain high for a long time. Longer-dated 10- and 30-year Treasuries, which have sold off heavily in recent weeks, are particularly sensitive to the growth outlook.

Strong GDP numbers can also impact consumer and business sentiment, which could have a knock-on effect on behavior and inflation expectations.

Initial market reactions to the GDP data were weak, with modest declines in Treasury yields and a slight rise in stock market futures immediately after the release.

The yield on the 10-year Treasury note fell by 0.04 percentage point to 4.91 percent. Fed policy expectations in the futures market were stable, with investors betting that there is only a 27 percent chance that the Fed will raise interest rates again this year.

Some sectors of the economy were affected by high interest rates, especially the real estate sector. Existing home sales fell to their slowest pace in 13 years in September as mortgage rates rose.

Consumer spending has been far more resilient than most economists expected this year, as strong retail sales data earlier this week helped briefly push the 10-year Treasury yield to a 16-year high.

Consumers have been helped by a combination of higher wages and slower inflation, said Sophia Drosos, an economist at Point72 Asset Management.

“The pace of consumption is likely to moderate… [but] If we continue to see low inflation while the labor market is healthy, consumers will remain on solid footing.

Thursday’s numbers are based on preliminary data. The BEA is due to publish a second estimate late next month, and a third figure in December.