Weekly Update 11/01/2024: US Economy Grows at a Robust 2.8% in Third Quarter
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Domestic Economic News
The US economy expanded at a robust pace in the third quarter as household purchases accelerated ahead of the election and the federal government ramped up defense spending. Inflation-adjusted gross domestic product increased at a 2.8% annualized rate after rising 3% in the previous quarter, according to the government’s initial estimate published Wednesday. Consumer spending, which comprises the largest share of economic activity, advanced 3.7%, the most since early 2023. The acceleration was led by broad increases across goods, including autos, household furnishings and recreational items. At the same time, a closely watched measure of underlying inflation rose 2.2%, roughly in line with the Federal Reserve’s target, figures from the Bureau of Economic Analysis showed. The report card for the world’s largest economy illustrates solid momentum in domestic demand as the Fed began unwinding its tightest monetary policy program in decades. It’s also the last before Election Day, as American voters size up the general snapshot of US economic activity against their own financial situation, which has been beset in recent years by a high cost of living. A separate ADP Research Institute report released Wednesday showed strong hiring in the private sector in October. GDP in the third quarter was restrained by volatile trade figures, which showed net exports subtracted 0.56 percentage point from the top line. Retailers stepped up imports of consumer goods as the quarter drew to a close on fears of a lingering dockworkers strike. Inventories also subtracted 0.17 percentage points.
However, a measure of underlying growth trends favored by economists that combines consumer spending and business investment, known as final sales to private domestic purchasers, advanced 3.2%, the most this year. Government spending rose an annualized 5%, led by the largest increase in federal output since early 2021. National defense expenditures surged at a 14.9% rate, the most since 2003. Federal government spending excluding defense rose at the quickest pace in a year. Nonresidential fixed investment rose an annualized 3.3%, the slowest in a year and dragged down by spending on structures. However, business spending on equipment was the strongest since the second quarter of 2023, boosted by transportation. Outlays on computers and peripheral equipment surged 32.7%, the most since 2020, illustrating the ongoing boom in artificial intelligence. Residential investment declined an annualized 5.1%, the most since the end of 2022, as the housing market struggled under the weight of high mortgage rates and prices. The numbers should keep the Fed on track to continue cutting interest rates in the coming quarters, including at their meeting next week.
Home-price gains in the US slowed in August as high borrowing costs weighed on potential buyers. A national measure of prices rose 4.2% from a year earlier, according to data from S&P CoreLogic Case-Shiller. That was smaller than the 4.8% increase in July. The index for August tracks a three-month period starting in June, when the average rate on a 30-year mortgage hovered above 6.8%. Borrowing costs later eased, but have started ticking up in recent weeks. High mortgage rates are weighing on the housing market. Closed sales of previously owned homes were down to a 10-month low in August and fell further in September, according to the National Association of Realtors. “Home-price growth is beginning to show signs of strain, recording the slowest annual gain since mortgage rates peaked in 2023,” Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices, said in a statement Tuesday. The Federal Reserve cut its benchmark interest rate in September. Investors have been speculating about the size of any future cut by the central bank given strong economic data in recent weeks. In August, a measure of prices in 20 cities rose 5.2% from a year earlier, compared with a 5.9% annual gain in July, the S&P CoreLogic Case-Shiller data show. New York had the biggest increase with an 8.1% climb in prices, followed by Las Vegas and Chicago.
Applications for US unemployment benefits fell last week to their lowest since May as southeastern states continued to recover from the impact of two severe storms. Initial claims decreased by 12,000 to 216,000 in the week ended Oct. 26. The median forecast in a Bloomberg survey of economists called for 230,000 applications. Continuing claims, a proxy for the number of people receiving benefits, fell to 1.86 million in the previous week, according to Labor Department data released Thursday.
US hiring advanced at the slowest pace since 2020 in October while the unemployment rate held at a low level in a month distorted by severe hurricanes and a major strike. Nonfarm payrolls increased 12,000 last month, following downward revisions to the prior two months. The unemployment rate held at 4.1% and hourly earnings remained firm, according to Bureau of Labor Statistics figures released Friday. BLS said the hurricanes likely affected payrolls in some industries, but said it is not possible to quantify the net effect on the monthly change in national employment, hours or earnings estimates. They noted the collection rate for the survey of businesses that informs those statistics was “well below average.” BLS also said there was no discernible effect on the national unemployment rate. The jobs report is the last major data point on the US economy before next week’s Federal Reserve meeting. With a number of temporary factors and caveats to glean through, economists and policymakers will likely take little signal from the report, instead looking to other data that show the labor market is cooling gradually. Fed officials — who are observing their traditional blackout period before the Nov. 6-7 meeting — are more focused on preserving the labor market with inflation largely on a downward trend. Policymakers are widely expected to cut interest rates by a quarter percentage point next week, a more measured adjustment after an outsize reduction in September. The rate cut followed a weak August job report. Data out Friday showed that figure was even weaker than initially reported, rising just 78,000 in the month. But September’s employment report — which came out shortly after the Fed met — was a blowout. Subsequent data also pointed to strong economic activity, encouraging several officials to advocate for a more gradual approach to rate cuts going forward. Hiring increased in health care and government, but employment in other industries was largely flat or negative. Sectors including retail trade, transportation and warehousing, and leisure and hospitality all declined — likely a reflection of weather-related disruptions. Manufacturing payrolls employment fell 46,000, the biggest drop since April 2020 and largely reflecting strike activity including 33,000 Boeing Co. workers.
Interest Rate Insight and the Fed
The Federal Reserve’s preferred measure of underlying US inflation posted its biggest monthly gain since April, bolstering the case for a slower pace of interest-rate cuts following last month’s outsize reduction. The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.3% in September, and 2.7% from a year earlier, according to Bureau of Economic Analysis data out Thursday. Overall inflation was 2.1%, the lowest since early 2021 and just above the central bank’s 2% goal. Inflation-adjusted consumer spending advanced 0.4%, an acceleration from the prior month supported by continued growth in wages and salaries. The saving rate fell to 4.6%, the lowest since 2023. Thursday’s figures cap a month of upside surprises in key economic reports that will likely augur a cautious approach to rate cuts in the months ahead. The Fed is widely expected to authorize a second reduction at the conclusion of its Nov. 6-7 policy meeting following an initial cut in September. “The new information is the trajectory of consumption heading into this quarter. The increase in real consumer spending in September puts it on a favorable course, removing some downside risk to our forecast,” Ryan Sweet, chief US economist at Oxford Economics, said in a note. “Growth in real disposable income is a little light, but with inflation expected to decelerate a little, household purchasing power will get a lift.” Details of the September inflation numbers showed a bump in price pressures across both goods and services. Services prices excluding housing and energy rose 0.3%, marking an acceleration from the prior month. Goods prices excluding food and energy rose 0.1%, while food prices were up 0.4%, the most since early this year. The spending data pointed to ongoing consumer resilience, particularly for merchandise purchases. Overall services spending, which makes up the bulk of household consumption, rose 0.2% in September. Goods spending advanced 0.7% as shoppers took advantage of a trend toward lower prices this year.
Impactful International News
Ireland’s economy rebounded in the third quarter while Belgium kept expanding, positive omens for the euro-zone region this quarter. Irish gross domestic product rose 2% in the three months through September, after a contraction of 1% in the prior period, the statistics agency in Dublin said on Tuesday. Belgian momentum slowed slightly, with a reading of 0.2% — down from 0.3%. Ireland’s role as a tax base for US multinationals leads to huge swings between growth or contraction that can sometimes influence the overall result for the region. Despite being one of the euro area’s smaller economies, its data have recently had an out-sized effect on expansion when the bloc itself has largely stagnated. Irish statisticians attributed third-quarter momentum to the country’s international industrial companies. Policymakers have repeatedly highlighted that GDP isn’t the most accurate measure to gauge Irish growth, and prefer so-called modified domestic demand, or MDD. Still, any expansion is good news for the government, which is expected to call elections in the coming weeks. Tuesday’s GDP numbers could potentially support expectations of forecasters that the euro zone kept expanding in the quarter. The median estimate is for a 0.2% increase in GDP, maintaining the pace of the previous quarter.
The euro area’s economy expanded more strongly than expected in the third quarter — with even Germany avoiding the recession it was widely tipped to endure. Growth in the 20-nation currency bloc quickened to 0.4%, while economists had predicted it would hold steady at 0.2%, as momentum in France accelerated and stayed strong in Spain. Germany’s surprise 0.2% increase in gross domestic product caught analysts off guard, though the reading for the previous three months was revised down sharply. The weak point was Italy, where output was unexpectedly flat, driven by a negative contribution from net trade. On the inflation front, separate data from Spain showed consumer-price gains accelerating a touch to 1.8% but remaining inside the European Central Bank’s 2% target. Wednesday’s data may ease some of the concerns about Europe’s economy that were on display last week when finance officials gathered in Washington for the International Monetary Fund’s meetings. A few ECB policymakers argued that a worsening outlook may necessitate heftier interest-rate cuts, while others urged caution. The surprisingly strong growth numbers might support arguments to maintain a gradual pace of easing and stick with traditional quarter-point reductions in borrowing costs. Traders pared bets on ECB rate cuts after the data barrage, pricing around a 25% chance of a half-point cut in December. Earlier this month, the implied probability was 50%, according to swap pricing.
Euro-area inflation accelerated more than expected — matching the European Central Bank’s target and boosting arguments for gradual rate cuts. Consumer prices rose 2% from a year ago in October, up from 1.7% the previous month and exceeding analysts’ estimates for a 1.9% increase, Eurostat said Thursday. A smaller decline in energy costs was a major driver of the move. Closely watched core inflation, which excludes volatile items, unexpectedly held steady at 2.7%, while increases in food prices were faster. The figures will support those ECB officials who’ve warned against outsized rate reductions to buoy the region’s sluggish economy. Investors have already pared wagers on a bigger cut to round off 2024, after growth figures on Wednesday showed the bloc on a firmer footing, with Germany dodging a recession. Traders are fully pricing a 25 basis-point ECB rate reduction in December. The debate among policymakers about the path ahead has intensified in recent days. Several argued last week that a half-point move should be considered on Dec. 12 after business surveys pointed to worsening momentum in the private sector. Others have pushed back. On Wednesday, ECB Executive Board member Isabel Schnabel said a “gradual” approach to monetary easing remains appropriate, while Bundesbank President Joachim Nagel said officials mustn’t rush further steps.
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