US economy: Third-quarter growth revised up to 5.2 per cent – but momentum waned
The U.S. economy grew faster than initially thought in the third quarter, but momentum appears to have since waned as higher borrowing costs curb hiring and spending.
Gross domestic product increased at a 5.2 per cent annualised rate last quarter, revised up from the previously reported 4.9 per cent pace, the Commerce Department’s Bureau of Economic Analysis 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 Reuters had expected GDP growth would be revised up to a 5.0 per cent rate. The economy grew at a 2.1 per cent pace in the April-June quarter and is expanding at a pace well above what Federal Reserve officials regard as the non-inflationary growth rate of around 1.8 per cent.
This comes after US Federal Reserve Governor Christopher Waller said on Tuesday he is “increasingly confident” the current setting of the central bank’s benchmark interest rate will prove adequate to lower inflation to the Fed’s two per cent target.
The comments, combined with strong figures today in the third quarter, will reassure businesses that there is further room for growth without risk of further rate hikes choking it off.
The upward revision to growth last quarter reflected upgrades to business investment as well as state and local government spending. Residential investment was also revised higher as was private inventory investment. But growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was lowered though to a still-solid 3.6 per cent rate. It was previously estimated to have increased at a 4.0 per cent rate.
Consumer spending appears to have cooled significantly at the start of the fourth quarter, with retail sales falling for the first time in seven months in October. The labour market is also easing. Job growth slowed last month and the unemployment rate rose to nearly a two-year high of 3.9 per cent.
Slowing demand has raised optimism that the Federal Reserve was probably done raising interest rates this cycle, with financial markets even anticipating a rate cut in mid-2024.
Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25 per cent to 5.50 per cent range.
Lindsay James, investment strategist at Quilter Investors, said “today’s US GDP revision for the third quarter shows an economy that keeps on rolling, despite the continued rate hikes and the risks that were spelled out from the OECD today.”
James said the economy was “buoyed in part by government spending as the Inflation Reduction Act (IRA) and CHIPS Act are seemingly now making themselves felt in the data.”
“Compared to the second quarter, the US consumer is showing surprising resilience with spending called out by the Bureau of Economic Analysis as boosting the level of growth.”
“Disposable incomes have increased by 0.1 per cent in Q3 – much slower than the 3.5 per cent growth seen in Q2 but nevertheless much better than the contraction pencilled into early Q3 estimates.
“The OECD’s Economic Outlook was published this morning, now predicting a soft landing for advanced economies in 2024, with US GDP forecasts raised from 1 per cent for 2024 to 1.3 per cent. This is a slowdown from earlier forecasts but the US economy is showing serious resilience in the face of strong economic headwinds. Ultimately this underlines the message from central banks of interest rates being ‘higher for longer’, and it will be some time before the Federal Reserve feels like it is in a position to cut.”
Its predictions for next year were a further downgrade on its September round when it lowered its expectations for the UK to grow by two percentage points to 0.8 per cent.
Reuters – Lucia Mutikani