U.S. Economic Growth Extends Solid Streak
by Harriet Torry
U.S. GDP rose at a 2.8% annual rate in the third quarter, easing slightly from the previous quarter.
The U.S. economy continued its recent strong stretch this summer, bolstered by hefty consumer and government spending.
Gross domestic product increased at a 2.8% annual rate in the third quarter, adjusted for seasonality and inflation, the Commerce Department said Wednesday. GDP is a broad measure of goods and services produced across the economy.
That was a slight slowdown from the second quarter’s 3% rate and below economists’ expectations for a 3.1% pace. Still, the July-to-September period marked a continuation of a roughly two-year streak of strong growth for the U.S. economy even in the face of historically high borrowing costs.
The report comes six days before the presidential election, in a race where the economy could be the deciding issue. For both candidates, the stakes could hardly be higher. Economists tend to believe that Kamala Harris would do a better job of controlling the deficit and inflation; voters tend to give better marks on the expected handling of the economy to Donald Trump.
The economy has outperformed expectations over the past couple of years under the Biden administration. A much-anticipated recession has yet to materialize, even though the Federal Reserve raised interest rates aggressively to curb inflation in recent years. Wednesday’s report points to an economy that is still humming, with strong consumer spending supported by a robust labor market, and business investment that remains solid.
Democrats have tried to focus the economic conversation around those positive metrics. President Biden said in a statement that the “GDP report shows how far we’ve come since I took office—from the worst economic crisis since the Great Depression to the strongest economy in the world.” Private-sector employers added a larger-than-expected 233,000 jobs in October, according to a separate report by payroll processor ADP, outstripping economists’ forecasts by nearly double.
Republicans have tried to focus voters on the big rise in prices over the past few years, and to put the blame on Democrats.
Consumer spending, which makes up the bulk of economic activity in the U.S., picked up to a 3.7% growth pace in the third quarter. Strong exports and government spending on defense were also tailwinds for growth. Contributions to quarterly change in real GDP for select categories Source: Commerce Department Note: Seasonally adjusted at annual rates
A measure of business spending cooled slightly from the second quarter but remained steady. Nonresidential fixed investment—which reflects companies’ outlays on software, equipment and structures—rose at a 3.3% rate.
The fact that economic growth remains strong even though the labor market is cooling slightly suggests that companies’ investments in digitization and technology during pandemic labor shortages are paying off from a productivity standpoint, said Julia Pollak, chief economist at ZipRecruiter.
“Surprisingly, despite restrictive monetary policy, consumer spending and investment continue to grow,” she said.
Final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, rose to a 3.2% annual pace in the third quarter from 2.7% in the second, the Commerce Department said.
The solid contributions from government, consumer and business spending “locks in the expansion’s second wind, which seemed to be gasping over the summer,” said Robert Frick, corporate economist with Navy Federal Credit Union, in a statement.
The housing market remained weak in the third quarter, a sign that still-high borrowing costs are weighing on the sector. Residential investment declined at a 5.1% rate, falling for the second quarter in a row.
The report showed inflation continued to ease during the third quarter, which combined with falling gasoline prices offered some relief to consumers.
Inflation, as measured by the personal-consumption expenditures price index, eased to a 1.5% annualized rate from 2.5% in the second quarter. Stripped of volatile food and energy prices, the so-called core index cooled to 2.2% from 2.8% in the prior quarter. The Fed targets 2% annual inflation.
Although overall growth slowed slightly from its second-quarter pace, by historical comparison it remained strong. In the last economic expansion, from the second quarter of 2009 through the fourth quarter of 2019, GDP increased at an average annual rate of 2.5%.
Current economic growth is also well above the pace economists see as the long-term trend. Fed officials put the U.S. economy’s longer-run growth rate at 1.8%, according to projections released at their most recent meeting in September.
“The economy is doing really well,” thanks in part to an artificial-intelligence boom and government spending through programs such as the Inflation Reduction Act, said Torsten Slok, chief economist at Apollo Global Management.
Consumer-focused companies have offered diverging viewpoints.
“There’s clearly parts of the consumer landscape where there’s pressure on disposable income,” Coca-Cola Chief Executive James Quincey said on an earnings call last week. “There’s a set of consumers exhibiting value-seeking behavior,” like looking for deals or making smaller purchases, he said.
“The economy overall feels really strong and really good,” countered Michael Glover, chief financial officer at InterContinental Hotels Group, during an earnings call last week. Corporate demand for travel is particularly strong, he said, as businesses send workers to events and conferences and on customer visits.
The GDP report shouldn’t change the general direction for the Fed, which cut rates last month and is expected to keep doing so.
Quarterly projections released at the last meeting showed a narrow majority of officials penciled in cuts that would lower rates by at least a quarter-point each at the meeting next week and again in December.
The two big, recent hurricanes are likely to show up more in the data for the fourth quarter and beyond. Hurricane Helene hit the Southeastern U.S. in the final days of the third quarter, causing widespread destruction. That was followed days later by Hurricane Milton, at the start of the fourth quarter.