The economy grew 2.8% in the third quarter. How it could affect Fed interest rates
The economy grew solidly again in the third quarter, bolstering the belief that the U.S. can dodge a recession and raising the odds the Federal Reserve will cut interest rates more modestly in the months ahead.
More sturdy consumer and business spending gains more than offset a drop in housing construction and a widening trade deficit.
The nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 2.8% in the July-to-September period, the Commerce Department said Wednesday. That’s down slightly from a 3% increase in the second quarter and 2.9% for all of 2023.
Economists surveyed by Bloomberg had forecast a 3% rise in output.
The report is the final broad snapshot of the economy before a historic election in which it has become a top issue. While economic growth has been healthy under President Joe Biden and Vice President Kamala Harris, the Democratic presidential nominee, Americans continue to be rankled by high inflation over the past few years. And 46% said former President Donald Trump had a better approach to the economy, compared with 38% who favored Harris, according to a Reuters/Ipsos poll this month.
"Overall, the U.S. economy appears to be doing just fine," economist Paul Ashworth of Capital Economics wrote in a note to clients. He added, however, that Wednesday's report doesn't reflect the effects of Hurricanes Helene and Milton that hit the Southeast in late September and early October as well as the Boeing workers strike that began in September. Those impacts will likely show up in the report on fourth-quarter growth.
Is the US economy doing well right now?
Despite high inflation and interest rates in the past few years, the economy has proven remarkably resilient, with robust wage gains propping up consumer spending and job growth.
Are consumers still spending money?
In the third quarter, consumption increased at an annual rate of 3.7%, above the 2.8% pace in the second quarter. Consumer spending makes up about 70% of economic activity.
An immigration surge has supplied a steady stream of workers to the job market, Goldman Sachs said, underpinning spending and easing labor shortages as baby boomers retire in large numbers.
But to cope with higher prices, Americans, particularly low- to middle-income households, have racked up record credit card debt and pushed delinquencies to a 13-year high. Lower-income consumers have depleted the money they socked away during the COVID-19 pandemic from stimulus checks and staying home.
Slower household spending and the lagged effects of high interest are likely to further crimp business revenue and job growth next year, some economists say.
How much is the Fed expected to cut interest rates?
The Fed, which cut rates in September for the first time since 2020 – by a hefty half-percentage point – amid slowing inflation and job growth worries, is expected to lower rates again next week and in the months ahead. Additional rate cuts should support more borrowing activity and economic growth but Fed officials are projecting smaller quarter-point reductions on concerns of reigniting inflation.
Pantheon Macroeconomics believes job growth will weaken more than anticipated, nudging the Fed to again push down rates aggressively.
The Fed hiked its key rate to a 23-year high of 5.25% to 5.5% in 2022 and 2023 after inflation hit 9.1% in mid-2022, the highest since the early 1980s. It’s reducing rates now that inflation is modestly above the Fed's 2% target.
How other parts of the economy performed:
Business investment increases
Business investment grew 3.3% after rising 3.9% the prior quarter.
Company purchases of computers, delivery trucks, factory machines, and other equipment jumped 11.1%. Although high interest rates are still boosting borrowing costs, the Fed’s recent rate cut and the prospect of more should spur more borrowing and investment, said Wells Fargo economist Sam Bullard.
Many companies are buying labor-saving technology, including artificial intelligence, to increase productivity and fill in the gaps left by labor shortages.
Spending on buildings, oil rigs and other structures fell 4%.
Government spending rises
Government outlays increased 5%, up from 3.1% the previous quarter. Federal spending leaped 9.7%. State and local purchases increased 2.3%.
Legislation passed by Congress to spur infrastructure and clean energy construction has provided loans, grants and tax credits to state and local governments to boost investment.
Housing hurts growth
Housing construction and renovation fell 5.1%, slipping for a second quarter after four straight gains.
Homebuilding picked up as the prospect of Fed rate cuts pushed down mortgage rates but rates ticked up recently.
Trade dings GDP again
Trade pulled down growth for a third straight quarter as imports outpaced exports.
Imports surged 11.2% as Americans kept buying overseas products. Exports rose a healthy 8.9% but the bigger trade gap slowed GDP growth.
(This story has been updated to add new information.)