The US economy expanded at a blistering 4.9% annual rate last quarter, according to the advance read on Q3 GDP released Thursday.
That was markedly ahead of consensus, which is saying something in this case: Economists expected 4.5% by the time the BEA released the figures. That would’ve easily counted as a gangbuster print. But thanks to the insatiable American consumer, the world’s largest economy logged an even brisker pace of growth.
The range of estimates, from nearly six-dozen economists, was 2.8% to 6%. Q3 was the best quarter for the headline since Q4 2021.
I’ll recycle some language from my GDP preview. The Fed is avowedly trying to engineer below-trend growth in order to stifle inflation. 4.9% isn’t below-trend. In fact, it’s well above-trend, and it’s not likely consistent with price stability.
Although rapid growth should be good news, this is too rapid. Thursday’s headline will almost invariably add to concerns that the Fed hasn’t succeeded in cooling demand sufficient to stifle an inflation impulse that’s still percolating on the services side of the economy. Spending on services contributed 1.62ppt to the GDP print.
Personal consumption grew 4% in Q3, Thursday’s data suggested. That was more than triple Q2’s rate, and ahead of estimates (although not by as much as the headline GDP reading).
Again, it’s hard to square that with the Fed’s stated goal of moderating demand through higher rates. The legacy of the pandemic wealth effect boom is still with us.
As discussed here at some length last week, part of the issue is the juxtaposition between the very low amount of variable rate debt on household balance sheets (as a percentage of the total), very low rates on the fixed rate portion of household debt and suddenly high rates on money market funds and savings. Money funds alone are throwing off more than $20 billion in monthly income.
Overall, consumption accounted for 2.69ppt of the GDP headline.
You can get as granular as you like, but only net trade was a drag using the commonly cited breakdown shown above. Inventories chipped in 1.32ppt.
Business spending slowed dramatically. In fact, it contracted. Nonresidential fixed investment fell 0.1% in Q3, Thursday’s data revealed. That’s a hangover of sorts. Recall that business spending was very robust in Q2, and indeed in most quarters of the post-pandemic era.
Final sales to private domestic purchasers, a key line item, increased smartly. Notably, residential investment posted the first increase since Q2 of 2021. Last quarter was the first in 10 that residential investment wasn’t a drag.
The headline PCE price index came in well ahead of estimates at 3.5% versus 2.7% expected. Mercifully, core printed below consensus at 2.4%, down from 3.7% in Q2.
Meanwhile, jobless claims printed 210,000 for last week. That was slightly ahead of estimates, as was the continuing claims update covering the prior (NFP survey) week. I don’t think that changes the overarching narrative about America’s “bulletproof” labor market, though.
If you really wanted to, you could stitch together a constructive take using the moderate core PCE print from the GDP report, the uptick in claims and the resilient US consumer on the way to suggesting Thursday’s data was a “Goldilocks” story. I don’t know if that’s the way I’d frame it, but if you’re so inclined, that’s the template.
As far as the very near-term policy outlook, the November FOMC meeting is still a hold barring some last minute WSJ article. I didn’t personally see anything in Thursday’s data which calls for a Timiraos intervention.
So, higher interest rates are fueling spending and stoking inflation… Makes sense. We saw something similar in Japan 20 years ago.
As our DL opined recently, how high would rates have to go to crush the consumer spending? And how much collateral damage would it cause?
The econometric models aren’t working real well. Reminding us that in the short run, models are merely an attempt to explain the unexplainable, not scientific fact.
The good news is that T-bill supported money funds are paying out nearly $250 billion a year in interest. The bad news is that this interest is our money to begin with. We are paying ourselves through the miracle money machine. I’m fine with that because what I’m getting is more than half what I will pay in taxes to the Treasury and that feels like a bargain.
I will bet that these numbers are restated downwards and that Q4 will show a move to recession – certainly much lower if not negative. The world has no experience with economic weakness – it is the greater fools that are still buying. Where – and who – is the next fool? Equities say distribution. The market prices are the leading indicator.
H-Man. this economy is like watching a glacier melt, it moves slowly and then big chunks fall into the ocean.