The U.S. economy expanded by 4.9 percent in the third quarter, topping economists’ expectations of 4.3 percent growth, according to the first estimate from the Bureau of Economic Analysis. This was up from the second quarter print of 2.1 percent.
This represented the sharpest gain since 2014 outside of the coronavirus pandemic years. It was also double the rate of growth in the first half of 2023.
The better-than-expected GDP growth rate was fueled by real consumer spending, which advanced by 4 percent in the July-to-September period. The consumer contributed 2.69 percent to the final GDP number.
Federal, state, and local government spending also drove the strong GDP reading. Federal spending soared by 6.2 percent, national defense spending spiked by 8 percent, and state and local spending surged by 3.7 percent. Overall, government outlays from all three levels of government contributed nearly 1 percent to the growth rate.
The agency’s data further show that the acceleration in real GDP reflected gains in private inventory investment, a jump in exports, and a boost in residential fixed investment.
Personal consumption expenditure (PCE) prices climbed to 2.9 percent, up from 2.5 percent. Core PCE, which omits the volatile energy and food components, eased to a better-than-expected 2.4 percent. This was down from the previous quarter’s core PCE of 3.7 percent.
Although consumer spending surged, real disposable personal income slipped by 1 percent in the third quarter, down from 3.5 percent in the previous quarter. The personal savings rate also declined from 5.2 percent to 3.8 percent. Both figures indicate that consumers might have continued tapping into their pandemic-era savings and credit tools to pay for the consumption.
Accompanying the gross domestic product on Oct. 26 were two reports from the Census Bureau: durable goods orders and the trade balance.
Durable goods orders soared by 4.7 percent in September, topping the consensus estimate of 1.7 percent.
The trade deficit widened to $85.78 billion last month, according to the Census Bureau’s advance estimate.
The U.S. financial markets pared some of their losses in pre-market trading on Oct. 26, with the leading benchmark indexes down by as much as 0.6 percent.
Treasury yields were mostly down. The benchmark 10-year yield tumbled nearly 3 basis points to around 4.925 percent. The 2-year yield shed 2.5 basis points to below 5.1 percent, and the 30-year bond dropped more than 2 basis points to under 5.07 percent.
Don’t Worry, Be Happy
Considering many of the negative forecasts over the past year, the latest GDP print might have taken observers by surprise.The better-than-expected performance of the global economy prompted JPMorgan Chase CEO Jamie Dimon to slam the central banks for being “100 percent dead wrong” over the past 18 months, urging “humility about financial forecasting.”
“There’s a kind of omnipotent feeling that central banks and governments can manage through all this stuff—I’m cautious,” Mr. Dimon said, conceding that he also fell for the negative projections.
This past spring, Mr. Dimon warned of a “hurricane” that would slam into the global economy. These remarks amplified recession fears that had already influenced the yield curve in U.S. Treasurys and other forecasts from leading banks and economists.
A recession is defined as two consecutive quarters of negative GDP growth. The U.S. economy slipped into a technical recession in the first half of 2022 but has since recovered with steady quarterly expansions.
According to Goldman Sachs’s Bi-Annual Equity Capital Markets Survey, investors have mixed outlooks. Forty-six percent think the recession outlook for this year and the first quarter of 2024 is uncertain. At the same time, 41 percent of respondents are planning for a soft landing, a Goldilocks zone of economic growth, strong labor markets, and the elimination of inflation.
The Federal Reserve also abandoned its recession call this past summer after staff economists predicted a downturn by the end of the year due to the fallout of the banking crisis in March. However, Fed Chair Jerome Powell has asserted on multiple occasions that the economy needs to achieve below-trend growth to eradicate the inflation threat.
Still Waiting for a Recession
Looking ahead to the fourth quarter and 2024, a chorus of economists and Wall Street titans maintain gloomy outlooks.Because monetary policy functions with a lag and takes its time to work its way through the economy, Ben Kirby, co-head of investments at Thornburg Investment Management, said higher interest rates will “continue to slow things.”
“It takes a while for tighter monetary policy to work its way through the economy,“ Mr. Kirby wrote in a research note. ”If you look at home affordability, it’s at a 40-year low, which is quite exceptional. It’s hard to buy a house today since prices have become elevated, and interest costs have increased a lot as well. The cost on a monthly basis of buying a new car is up 30 to 40%, so volumes of cars and autos are slowing significantly. That’s just one example of how higher rates are taking a bit longer to work through the economy, but eventually, they’ll continue to slow things.”
Jeff Klingelhofer, co-head of investments at Thornburg, continues to “preach caution.”
“Coming into this year, we certainly expected a much slower economic environment and lower growth,” he said. “Red-flashing signals such as how the yield curve has inverted sharply over the past year, or how PMIs have remained below 50 for 10 months now, hasn’t led to the slowdown that we expected, so I think we need to continue to look towards the future.”
Bill Gross, former CIO of Pacific Investment Management and the so-called Bond King, wrote on X, formerly known as Twitter, that a recession is coming in the home stretch of 2024.
“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly,” he said.
“Recession in fourth quarter.”
Additionally, many of the leading recession indicators are still flashing red.
The 2- and 10-year yield curve has been inverted for 16 months, with a spread of negative 13 basis points. The Fed’s preferred 3-month and 10-year spread is negative 64 basis points.
“Although the six-month growth rate in the LEI is somewhat less negative, and the recession signal did not sound, it still signals risk of economic weakness ahead,” Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board, said in the latest report. “So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation. Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”
