The U.S. economy grew by an annual rate of 4.9% in the third quarter, the strongest pace since 2021 and twice the pace of growth in th second quarter. Before the report from the Bureau of Economic Analysis, economists surveyed by Bloomberg were expecting annual growth of 43%. Growth at that rapid a pace, they worried then, could lead the Federal Reserve to consider raising interest rates at its November 1 meeting.
Obviously now, after growth at 4.9% far exceeded projections of 4.3% growth, those worries are a little more pronounced. But only a little. This morning as of 11 a.m. New York time the Standard & Poor’s 500 was down but only by 0.66%. The NASDAQ Composite was lower by 1.05%. Th small-cap Russell 2000 decided that stronger growth was good for smaller companies and far-outweighed risks of an interest rate increase. The Russell 2000 was up 1.13%. The yield on the 10-year Treasury actually fell 6 basis points to 4.89%.
So why the very muted reaction to what could be seen as really, really negative news for Fed policy and interest rates?
The take on this growth rate by economists this mornings is that its speed can’t be sustained and that a substantial portion of this growth is “borrowed” from the fourth quarter and will have to be paid back in lower growth in that period. In the quarter U.S.households increased spending on both necessities, such as housing, utilities and prescription drugs, as well as luxuries including dining out, hotel stays and recreation.
But consumer spending for the rest of the year faces significant headwinds, economists believe. Pandemic savings will continue to dry up and millions of households will resume student loan payments. Fears of a government shutdown, ongoing strikes by actors and autoworkers, and worsening wars in Ukraine and Gaza also add to the uncertainty. And higher levels of uncertainty tend to push dollars toward saving and away from spending.
“The U.S. consumer has so been hanging tough and powering the economy forward, but I expect much slower growth the rest of the year,” Mark Zandi, chief economist at Moody’s Analytics, told Bloomberg. He said it’s likely that economic growth will slow to an annualized rate of 1% in the fourth quarter.
Other data released today showed that inflation continues to moderate. The core Personal Consumption Expenditures price index, the Fed’s favorite inflation measure, fell to an annual rate of 2.4% in the third quarter. Adding back in the more volatile food and energy prices stripped out in the core inflation rate, the all items PCE inflation index increased at a 2.9% annual rate. One bit of contrary bad news came from the service sector, where inflation rose at a 3.6% rate, a slight pickup from the prior quarter.