Daily Management Review

US Economy Performs Spectacularly Well In The Third Quarter


US Economy Performs Spectacularly Well In The Third Quarter
Despite grave predictions of impending recession, the U.S. economy expanded by nearly 5% in the third quarter. This was fueled by rising salaries as a result of a tight labour market and rapid corporate restocking in response to robust demand.
The strongest growth rate in over two years was also fueled by a resurgence in residential investment, which had been declining for nine straight quarters, according to the Commerce Department's Bureau of Economic Analysis's advance estimate of the third-quarter GDP on Thursday.
Spending by the government increased. However, company investment fell for the first time in two years as spending on computers and other equipment decreased and the stimulus from building facilities associated with President Joe Biden's administration's push to promote further semiconductor production in the US faded.
Even if the summer's spectacular performance is probably not sustainable, it demonstrated the economy's resilience in the face of the Federal Reserve's relentless interest rate hikes. Due to the United Auto Workers strikes, the fact that millions of Americans are starting to repay their student loans, and the delayed effects of the rate hikes, growth may weaken in the fourth quarter.
The report also revealed that previous quarter's underlying inflation significantly decreased. The majority of economists have updated their projections and now think the Fed can orchestrate a "soft-landing" for the economy. They cite anticipations that worker productivity will continue to be strong in the second quarter and that unit labour costs will moderate between July and September.
"We've seen for a period of time now a post pandemic induced negative bias about an imminent recession and persistent inflation," said Brian Bethune, an economics professor at Boston College. "But not only is the economy surprisingly resilient, we also got productivity-driven growth for two consecutive quarters in 2023, meaning the business cycle still looks very solid."
The most rapid increase in the GDP since the fourth quarter of 2021 occurred last quarter, with an annualised rate of 4.9%. Reuters polled economists, and they predicted a 4.3% annual growth rate in GDP. The economy grew by 2.1% during the April-June quarter, and it is currently growing at a rate significantly faster than the 1.8% non-inflationary growth rate that Fed policymakers believe it to be.
After growing at a pace of just 0.8% in the second quarter, consumer spending growth, which makes up more than two-thirds of the U.S. economic activity, accelerated at a 4.0% rate. It was fueled by spending on both goods and services and contributed 2.69 percentage points to GDP growth.
Despite slowing down, salary growth is still increasing somewhat faster than inflation, which boosts the purchasing power of households. 
The personal tax rate increased last quarter, offsetting part of the salary gain. As a result, households' take-home income decreased by 1.0%. As a result, several consumers had to draw on their savings to cover part of their expenses. From 5.2% in the second quarter to 3.8% now, the saving rate decreased.
On Wall Street, stocks dropped. In relation to a currency basket, the dollar increased. Treasury yields in the US fell.
Spending may be impacted by the combination of the falling saving rate and the October start of student loan repayments, which economists calculated to be worth around $70 billion, or roughly 0.3% of disposable personal income. Due to rising borrowing rates, low-income customers are turning more and more to debt to finance their expenditures, which is why credit card delinquencies are on the rise.
By the first quarter of 2024, the extra funds that high-income households acquired during the COVID-19 pandemic are expected to exhaust, according to economists. A significant slowdown is anticipated by some economists, a worry that United Parcel Service expressed on Thursday when it reduced its revenue projection for 2023 for the second consecutive quarter.
Some, however, are less concerned, contending that the robust labour market and substantial government handouts during the pandemic were more important to spending than credit.
"It is too early to take slower growth for granted, especially after three quarters of consistently stronger-than-expected economic activity," said Chris Low, chief economist at FHN Financial in New York. "Any economist working on an update of their estimate of when pandemic savings will run out needs to tear it up and start thinking about what has allowed consumption to remain so strong. It is not borrowing."
A separate report released on Thursday by the Labour Department demonstrated the resilience of the labour market. It showed that initial claims for state unemployment benefits increased by 10,000 to a seasonally adjusted 210,000 in the week ending October 21, remaining at the very low end of their range of 194,000 to 265,000 for this year.
Following an initial week of aid, the number of recipients of benefits—a stand-in for hiring—rose by 63,000 to 1.790 million for the week ending October 14, marking the biggest amount since early May. There was disagreement among economists as to whether this indicated that jobless people were going through lengthier periods of unemployment or if it was a result of problems correcting the data for seasonal variations.
Last quarter, inventory accumulation increased at a rate of $80.6 billion, adding 1.32 percentage growth points to the GDP.  
Due to businesses' reliance on imports for restocking, there was a slight trade deficit, which slightly slowed GDP growth. With trade and inventories excluded, the economy expanded at a healthy 3.5% annual rate.
Given the tightening financial circumstances brought on by the recent selloff in the stock market and the spike in U.S. Treasury yields, the GDP report is unlikely to have much effect on short-term monetary policy.
The price index for personal consumption expenditures (PCE) excluding food and energy increased at a 2.4% annual rate, indicating a further relaxation of underlying pricing pressures. Following a 3.7% pace growth in the second quarter, that was the weakest pace since the fourth quarter of 2020.
One of the inflation indicators that the Fed monitors for its 2% target is the so-called core PCE price index.
Next Wednesday, the US Federal Reserve is anticipated to maintain current interest rates. Since March of last year, it has increased its benchmark overnight interest rate by 525 basis points, bringing it to the current range of 5.25% to 5.50%.
"From the Fed perspective there is little here to suggest any need to start lowering rates, nor does this suggest an imminent need to raise them again either," said Richard de Chazal, macro analyst at William Blair in London.