- GDP growth increased from 4.9% to 5.2% in the third quarter
- Consumer spending revised downwards; Core inflation reduced
- Corporate profits rise 4.3%; Savings rate increased
WASHINGTON, Nov 29 (Portal) – The U.S. economy grew faster than initially expected in the third quarter as companies built more warehouses and stockpiled machinery. But momentum appears to have slowed since then, as higher borrowing costs curb hiring and spending.
However, the pace of growth, which was the fastest in nearly two years, likely exaggerated the health of the economy in the last quarter. Measured on the income side, economic activity increased moderately. Still, Wednesday’s Commerce Department report suggested the economy continued to grow despite fears of a recession that have lingered since late 2022.
“There is no sign in today’s report that the sky is darkening for the economy, but growth is cooling,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There simply isn’t as much wind in the economy’s sails in the last quarter of this year.”
Gross domestic product rose 5.2% on an annual basis last quarter, up from the 4.9% previously reported, the Commerce Department’s Bureau of Economic Analysis (BEA) said in its second estimate of third-quarter GDP. It was the fastest pace of expansion since the fourth quarter of 2021.
Economists polled by Portal had expected GDP growth to rise to a rate of 5.0%. The economy grew at a pace of 2.1% in the April-June quarter, growing at a rate well above what Federal Reserve officials consider a noninflationary growth rate of about 1.8%.
The upward revision to growth reflected higher business investment in buildings, particularly warehouses and healthcare facilities. State and local government spending was also revised upwards. Residential investment also rose thanks to the construction of more single-family homes, helping to end nine straight quarters of decline.
Private inventory investment was higher than previously estimated as wholesalers accumulated more machinery equipment. Inventory investment boosted GDP growth by 1.40 percentage points, up from the 1.32 percentage points estimated last month.
However, growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was cut to a still solid 3.6%. The decline from the previously estimated growth pace of 4.0% was due to cuts in spending on financial services and insurance as well as used light commercial vehicles, likely due to shortages caused by the recently ended United Auto Workers strike.
Stocks on Wall Street traded higher. The dollar remained stable against a basket of currencies. US Treasury bond prices rose.
Portal graphics
MIXED DETAILS
After-tax profits excluding inventory valuation and capital consumption adjustment, which reflect S&P 500 profits, rose $126.2 billion, or 4.3%. Profit rose 0.8% in the second quarter. The increase in profits occurred at domestic financial and non-financial companies as well as in the rest of the world.
Personal income was higher than originally estimated, leading to wage increases. The savings rate was increased from 3.8% to 4.0%. Higher wages helped the economy grow at a 1.5% rate on the income side in the last quarter, the fastest in a year.
Gross domestic income (GDI) rose by 0.5% in the second quarter. But gross domestic investment fell 0.2% year-on-year, the first decline in three years.
“The only time the economy, as measured by incomes, contracted at this rate and wasn’t in recession was in the third quarter of 2007. The next quarter, a recession began,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
In principle, GDP and GDI should be the same, but in practice they differ because they are estimated based on different and largely independent source data. The GDI-GDP gap has widened again after narrowing when the BEA conducted its annual benchmark revisions in September.
The average of GDP and GDI, also known as gross domestic production and considered a better measure of economic activity, rose 3.3% in the July-September period, accelerating from a 1.3% growth pace in the second quarter.
However, this is a thing of the past as economic activity appears to have cooled significantly at the start of the fourth quarter and retail sales fell in October for the first time in seven months. Job growth slowed last month and the unemployment rate rose to 3.9%, its highest level in nearly two years.
The moderate growth outlook was bolstered by other Census Bureau data that showed the goods trade deficit widened 3.4% to $89.8 billion in October due to declining exports. That suggests trade could slow GDP growth this quarter after being a neutral factor in the April-June period. Wholesale inventories fell while retail inventories remained unchanged.
A third Fed report showed that economic activity slowed from early October to mid-November, “with four counties reporting modest growth, two suggesting conditions were unchanged or declining slightly, and six seeing a slight decline in activity.” “
Slowing demand has raised optimism that the Federal Reserve is likely done raising interest rates this cycle, with financial markets even expecting a rate cut in mid-2024. Since March 2022, the Fed has raised its federal funds rate by 525 basis points to the current range of 5.25% to 5.50%.
The GDP report also confirmed that inflation is trending downward, with monetary policy measures observed by the Fed revised down slightly.
“The Fed could be in a tough spot,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “Inflation is trending down, the consumer is still spending money but at a slower pace. The Fed could end its campaign of interest rate hikes without causing much pain to the economy.”
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama, Paul Simao and Andrea Ricci
Our standards: The Trust Principles.
Acquire license rights, opens new tab