The U.S. economy boomed in the third quarter as a strong job market and falling inflation gave consumers confidence to spend freely on goods and services.
Gross domestic product, the main measure of economic performance, grew at an annual rate of 4.9 percent from July to September, the Commerce Department reported Thursday. It was the strongest reading since late 2021 and contradicted forecasts of a slowdown due to the Federal Reserve’s interest rate hikes.
The acceleration was made possible in part by slowing inflation, which boosted purchasing power even as wage growth slowed, and by a labor market that has shown new dynamism over the past three months.
That’s a far cry from the recession many had predicted at this time last year, before economists realized that Americans had accumulated enough savings to boost spending as the Fed made borrowing more expensive.
“There has been a huge increase in wealth since Covid,” said Yelena Shulyatyeva, senior economist at bank BNP Paribas, pointing to recent Fed data that showed average net worth rose 37 percent from 2019 to 2022. “People are still taking not just one vacation, not just two, but three and four.”
This level of spending, in turn, led to robust job growth in service industries such as hotels and restaurants, while sectors that benefited from pandemic purchasing trends, such as transportation and warehousing, returned to more normal levels. And with layoffs still near record lows, workers have little reason to hold off on purchases, even if it means using a credit card — an increasingly expensive option as interest rates rise.
One beneficiary of these open paperbacks is Amanda McClements, who owns a home goods store called Salt & Sundry in Washington, DC. Sales are up about 15 percent compared to last year, finally surpassing 2019 levels.
“People can’t get enough candles; This continues to be our best seller,” Ms McClements said. They’re also “more entertaining post-pandemic, so we’re doing really well on glassware, dinnerware and nice linens.”
However, Ms. McClements said business hasn’t been consistently good: her plant shop, Little Leaf, was never able to recover from the depths of the pandemic and was forced to close this year. “We’ve had a really uneven recovery,” she said.
Although consumers drove the majority of economic growth in the third quarter, other factors also contributed. For example, residential investments provide a boost even when interest rates rise: those who already own a home have little incentive to sell, so only newly built homes are on the market.
“The third quarter would be the sweet spot, with higher mortgage rates keeping people in place, builders capitalizing on the lack of existing supply and proving to be an improvement over previous quarters,” said Bernard Yaros, senior U.S. economist at Oxford Economics.
The recovery in growth is likely to be short-lived. Pitfalls lurk in the fourth quarter, including the depletion of savings, the resumption of mandatory student loan payments and the need to refinance maturing corporate debt at higher interest rates.
But for now, the United States is outperforming other major economies, partly because of its aggressive fiscal response to the pandemic and partly because it is better insulated from the Ukraine war’s impact on energy prices.
“We’re talking about the euro zone and the U.K. certainly being on the cusp of a recession, if not already in a recession,” said Andrew Hunter, deputy U.S. economist at Capital Economics, an analyst firm. “The US is still the global outlier.”
Jeanna Smialek contributed reporting.