Consumers power GDP to 4.9%
It's fastest expansion rate in nearly 2 years, but the big question is: What happens next?
The nation's economy expanded at a robust 4.9% annual rate from July through September as Americans defied higher prices, rising interest rates and widespread forecasts of a recession to spend at a brisk pace.
The Commerce Department said the economy expanded last quarter at the fastest pace in nearly two years and more than twice the 2.1% annual rate of the previous quarter.
Thursday's report on the nation's gross domestic product — the economy's total output of goods and services — showed that consumers drove the acceleration, ramping up their spending on everything from cars to restaurant meals. Even though the painful inflation of the past two years has soured many people's view of the economy, millions have remained willing to splurge on vacations, concert tickets and sports events.
“This is just a very resilient economy that continues to take hit after hit and keep on,” said Joseph Brusuelas, chief economist at RSM, a tax and consulting firm.
Yet the robust growth may prove to be a high-water mark for the economy before a steady slowdown begins in the current October-December quarter and extends into 2024. The breakneck pace is expected to ease as higher long-term borrowing rates, on top of the Federal Reserve's short-term rate hikes, cool spending by businesses and consumers. Economists have projected that growth could slow to an annual pace of just 1.5% in the final three months of this year.
One sign of the coming slowdown, Brusuelas said, was a 3.8% drop in business spending on new machinery and other equipment last quarter. That pullback likely reflected the higher cost of borrowing to finance such purchases.
And other key drivers of growth in the July-September period could prove short-lived. They include a surge in stockpiled goods that businesses added to their warehouses and store shelves. The buildup in these inventories accounted for about a quarter of last quarter's growth and isn't considered likely to be repeated.
An increase in house and apartment construction also boosted growth in the third quarter. But as mortgage rates near 8% and sales of existing homes continue to fall, analysts expect housing to weaken the overall economy in the coming months.
“We can already see the drag forming in the final three months of the year,” Brusuelas said.
In addition, consumers are spending more of their savings — a drawdown that could eventually weigh on growth. Many, particularly lower- and middle-income Americans, are stepping up their use of credit cards. These cards now carry much higher rates after the Fed boosted its benchmark interest rate to about 5.4%, its highest level in 22 years. Americans, as a whole, saved just 3.8% of their income last quarter, down from 5.2% in the April-June quarter and notably below pre-pandemic levels.
Several Fed officials acknowledged in speeches last week that the most recent economic data showed growth picking up by more than they had expected. Yet most of the policymakers signaled that they likely will keep their key rate, which affects many consumer and business loans, unchanged when they meet next week.
A range of factors have helped fuel consumer spending, which accounts for the bulk of the economy's growth. Though many Americans are still feeling under pressure from two years of high inflation, average pay has outpaced price increases and enhanced people's ability to spend.
And inflation is steadily easing, Thursday's report showed. Excluding volatile food and gas prices, core inflation slowed to a 2.4% annual rate in the third quarter, according to the Fed's preferred measure. That is down from 3.7% in the second quarter to the slowest pace in nearly three years.
Smaller price increases likely encouraged some people to spend lavishly on both goods and services last quarter. There were some one-time factors that boosted spending, like blockbuster concert tours by Taylor Swift and Beyonce. Fans spent an average of $1,500 on air fares, hotel rooms, and concert tickets to see Swift's shows, and an average of $1,800 for Beyonce, according to calculations by Sarah Wolfe, U.S. economist at Morgan Stanley.