US 3rd-Quarter GDP Revised Lower as Government Spending Adjusted Higher

Consumers shop for groceries at a retail chain store in Rosemead, Calif., on Dec. 12, 2023. Frederic J. Brown/AFP via Getty Images

The U.S. economy expanded less than expected as the Bureau of Economic Analysis (BEA) revised the third-quarter gross domestic product (GDP) data lower amid a sharp drop in personal consumption.

In the three months that ended on Sept. 30, GDP grew by 4.9 percent, down from the BEA’s second estimate of 5.2 percent. This matched the advance estimate in October.

Officials say downward changes to consumer expending, exports, and inventory investment caused the lower adjustment to the final GDP print. However, there were upward revisions to business and housing investment and federal, state, and local government spending that offset these decreases.

According to the final GDP print, personal consumption was revised down to 2.11 percent from 2.44 percent in the second estimate. It accounted for 43 percent of third-quarter growth.

Federal government consumption was altered higher to 0.99 percent, up from 0.94 percent. This represented 20 percent of the quarter’s expansion. State and local government spending was roughly the same at 0.53 percent, contributing 11 percent to the GDP rate.

In total, the government contributed about one-third to the bottom-line GDP.

Fixed investment added 0.46 percent to GDP, up from 0.42 percent in the second estimate. Revisions to private inventories added 1.27 percent to GDP, down from 1.4 percent. Net exports were flat at 0.03 percent, and imports skimmed 0.56 percent from the final reading.

E.J. Antoni, a Heritage Foundation economist, wasn’t surprised by the revisions.

“Well, color me shocked: final Q3 GDP print shows gov’t consumption grew more than previously estimated and personal consumption grew less; gov’t has grown faster than personal counterpart for last 5 quarters and is growing at fastest rate since Q2 ‘20 blowout covid spending,” he wrote on X, formerly known as Twitter.

Looking ahead to what the fourth quarter may look like, early estimates suggest that it'll be another period of expansion.

The Federal Reserve Bank of Atlanta’s GDPNow model estimate points to 2.7 percent. The New York Fed’s Staff Nowcast projections stand at 2.2 percent for the final three months of 2023. The St. Louis Fed’s Real GDP Nowcast alludes to a more conservative 1.65 percent.

Other GDP Report Data

The BEA also updated other components of the quarterly GDP data.

The GDP price deflator—a measurement of inflation in the prices of goods and services produced in the country—was revised lower to 3.3 percent from 3.6 percent. This was also up from 1.7 percent in the second quarter.

Personal consumption expenditures (PCE), a gauge of consumer prices, was also revised lower to 2.6 percent from 2.8 percent. PCE prices were slightly up from 2.5 percent in the previous quarter.

Core PCE prices, which strip the volatile energy and food components, were adjusted lower to 2 percent from 2.3 percent. This was considerably down from 3.7 percent in the April-to-June span.

Corporate profits experienced a notable change, too, to 3.7 percent in the final reading from 4.1 percent in the second estimate. Still, this was up from 0.5 percent in the second quarter.

What to Expect in 2024

Heading into the new year, economists and market analysts debate whether the U.S. economy will achieve a soft landing or endure a recession.

The consensus has recently been that the country will witness sluggish growth in 2024 as inflation pressures ease and the labor market loosens, effectively averting a downturn.

People walk along 5th Avenue in Manhattan, one of the nation's premier shopping streets, in New York on Feb. 15, 2023. Spencer Platt/Getty Images

The Congressional Budget Office recently forecast that the real GDP growth rate would be 1.5 percent next year. The Federal Reserve’s Summary of Economic Projections suggests that real GDP will be 1.4 percent, down from the September expectation of 1.5 percent.

However, the odds of a recession are much higher than what the financial markets think, according to Jim Besaw, founding principal at GenTrust.

“Inflation is unlikely to come down to the extent the market believes absent a recession, making rate cuts without a recession less likely than the market believes,” Mr. Besaw said in a note. “The odds of a recession are higher than the market believes.”

Jennifer McKeown, chief global economist at Capital Economics, said the lagged effects of the Federal Reserve’s monetary policy tightening should result in below-trend GDP growth, which could help core inflation return to the central bank’s 2 percent target by the middle of 2024.

“The combination of tight monetary policy and fading tailwinds that propped up activity during this past year should conspire to cause growth to weaken across advanced economies,” Ms. McKeown said in a note.

The Conference Board reiterated its recession call following the latest Leading Economic Index (LEI) data. In November, the LEI, one of the top recession indicators in the United States, fell by 0.5 percent and slumped by 3.5 percent over the six months between May and November.

“Despite the economy’s ongoing resilience—as revealed by the US CEI—and December’s improvement in consumer confidence, the US LEI suggests a downshift of economic activity ahead,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board. “As a result, The Conference Board forecasts a short and shallow recession in the first half of 2024.”

Fed Chair Jerome Powell has repeatedly noted that the United States needs to witness below-trend growth and softer labor conditions to eradicate inflation.