Shoppers walk inside the King of Prussia shopping mall, in King of Prussia, Pa., on Nov. 26, 2021.RACHEL WISNIEWSKI/Reuters
The U.S. economy grew solidly in the third quarter, with consumer spending increasing at its fastest pace in 1-1/2 years and inflation slowing sharply, continuing to defy forecasts of doom and outperforming its global peers.
The Commerce Department’s advance estimate of third-quarter gross domestic product on Wednesday also showed robust business investment in equipment last quarter. The report was published less than a week before Americans head to the polls on Nov. 5 to choose between Vice President Kamala Harris, the Democratic Party candidate, and former President Donald Trump.
Polls show the race is a toss-up, with the health of the economy top on the minds of Americans, who have grumbled about high food and housing costs. The economy has stayed resilient despite 5.25 percentage points of interest rate increases in 2022 and 2023 from the Federal Reserve to tame inflation.
“What’s not to like?” asked Chris Low, chief economist at FHN Financial. “Solid GDP growth fuelled by strong consumption and strong capital equipment spending, all accompanied by inflation sliding back toward 2 per cent.”
Gross domestic product increased at a 2.8 per cent annualized rate last quarter, the Commerce Department’s Bureau of Economic Analysis said. Economists polled by Reuters had forecast GDP advancing at a 3.0 per cent pace.
The economy grew at a 3.0 per cent pace in the second quarter.
The pace of growth was well above what Federal Reserve officials regard as the noninflationary growth rate of around 1.8 per cent.
The BEA said it was not possible to estimate the overall impact of Hurricane Helene on third-quarter GDP, noting that the destruction of fixed assets, such as residential and nonresidential structures, did not directly affect GDP or personal income. It, however, estimated that Helene resulted in losses of $39.0-billion in privately-owned fixed assets and $2.0-billion in state and local government-owned fixed assets.
The dollar rose against a basket of currencies. U.S. Treasury prices fell.
The report added to annual revisions published last month, which indicated that the economy was much stronger than had been previously estimated. The revisions almost erased the gap between GDP and gross domestic income (GDI), an alternative measure of growth, through the second quarter.
Prior to the revision, some economists had argued that gap suggested economic activity was being overestimated.
Consumer spending, which accounts for more than two-thirds of economic activity, grew at a 3.7 per cent pace. That was the fastest since the first quarter of 2021 and was up from the 2.8 per cent pace notched in the second quarter.
Though the labour market has slowed, layoffs are near historic low levels, and wages continue to rise at a solid clip. Household net worth has risen, thanks to a stock market boom and higher house prices. Savings remain high and inflation has also cooled down significantly, offering relief for households, especially lower-income families.
The personal consumption expenditures price index, excluding the volatile food and energy components – followed closely by the U.S. central bank – rose at a 2.2 per cent rate, sharply slowing from the 2.8 per cent pace in the second quarter.
With inflation nearing the Fed’s 2 per cent target, the central bank is now easing policy and last month kicked off that cycle with an unusually large half-percentage-point rate cut.
That reduction in borrowing costs, the first since 2020, lowered the Fed’s policy rate to the 4.75 per cent-5.00 per cent range.
Business spending on equipment surged at a 11.1 per cent rate, the quickest since the second quarter of 2023. Government spending also increased. But the pace of inventory accumulation slowed and the trade deficit widened. Inventories and trade both subtracted from GDP growth.
Residential investment, which includes home building and sales, contracted for a second straight quarter.