US economy grows 5.2% in third quarter; Higher interest rates slow the pace

  • Third-quarter GDP growth rose to 5.2% from 4.9%
  • Reduced consumer spending; Core inflation was reduced
  • Corporate profits up 4.3%; Savings rate is raised

WASHINGTON, Nov 29 (Reuters) – The U.S. economy grew faster than initially thought in the third quarter as businesses piled on more warehouses and machinery, but the pace appeared to have slowed as higher borrowing costs curbed hiring and spending.

The pace of growth, the fastest in almost two years, may have overstated the health of the economy in the last quarter. When measured by income, economic activity increased at a moderate pace.

Still, a mixed report from the Commerce Department on Wednesday was a reminder that the economy is continuing to grow despite fears of a lingering recession from late 2022.

„Today’s report shows no sign of a gloomy sky for the economy, but growth is cooling,” said Christopher Rupkey, chief economist at FWDBONDS in New York. „There is not much wind in the economy’s sails in the final quarter of the year.”

Gross domestic product grew at an annualized rate of 5.2% last quarter, revised up from a previously reported 4.9% pace, the Commerce Department’s Bureau of Economic Analysis (BEA) said in its second estimate of third-quarter gross domestic product. This is the fastest expansion since the fourth quarter of 2021.

Economists polled by Reuters had expected GDP growth to be revised up to a 5.0% rate. The economy grew at a 2.1% pace in the April-June quarter and is expanding faster than Federal Reserve officials expect a non-inflationary growth rate of 1.8%.

The upward revision to growth last quarter reflected improvements in business investment in infrastructure, mostly warehouses and healthcare facilities. Expenditure by state and local governments was also heavily revised.

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Residential investment also picked up as more single-family homes were built to end nine straight quarters of contraction.

Private inventory investment was higher than previously estimated as wholesalers stockpiled more machinery. Investment in goods added 1.40 percentage points to GDP instead of the 1.32 percentage points estimated last month.

But growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a more robust 3.6% rate. The downgrade from a previously estimated 4.0% growth pace was due to lower spending on financial services and insurance and used light trucks, likely a result of shortages caused by the recently concluded United Auto Workers strike.

Stocks traded higher on Wall Street. The dollar rose against a basket of currencies. US Treasury prices rose.

Reuters Graphics

Mixed details

After-tax profit without adjustments for inventory valuation and capital consumption, which was in line with S&P 500 profit, increased by $126.2 billion, or a 4.3% rate. Profit rose 0.8% in the second quarter. The increase in profits came from domestic financial and non-financial companies as well as the rest of the world.

Personal income was higher than initially estimated, attributed to wage increases. The savings rate has been raised from 3.8% to 4.0%. Higher wages contributed to economic growth at a rate of 1.5% last quarter, the fastest in a year, measured on the income side.

Gross domestic income (GDI) grew at a rate of 0.5% in the second quarter. But GDI contracted at a 0.2% pace on a year-on-year basis, the first decline in three years.

„The only time the economy, as measured by earnings, has slowed at this pace and not been in recession was in the third quarter of 2007. The recession started the next quarter,” said Conrad DiQuadros, senior economic adviser at Breen Capital in New York.

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In principle, GDP and GDI should be equal, but in practice they differ because they are estimated using different and often independent source data. When the BEA implemented its annual benchmark revisions in September, the gap between GDI and GDP widened again.

„Although the economy’s recent performance is quite subdued in the GDI numbers, both series ultimately suggest that the economy has avoided a recession this year,” said Michael Pearce, lead US economist at Oxford Economics in New York.

The average of GDP and GDI, also referred to as gross domestic product and considered a better measure of economic activity, increased at a rate of 3.3% in the July-September period, accelerating from a 1.3% growth pace in the second quarter.

However, retail sales fell for the first time in seven months in October, as economic activity was seen to have cooled significantly at the start of the fourth quarter. Job growth slowed last month and the unemployment rate rose to a nearly two-year high of 3.9%.

Prospects for moderate growth were bolstered by other data from the Census Bureau that showed the merchandise trade deficit widened 3.4% to $89.8 billion as exports fell in October. It suggested that trade may be a drag on GDP growth this quarter after being a neutral factor in the April-June period. While stocks of retailers remained unchanged, wholesale stocks declined.

With financial markets also expecting a rate cut in mid-2024, the need to slow has increased on hopes that the central bank will raise interest rates this cycle. From March 2022, the US Federal Reserve has raised its overnight interest rate by 525 basis points to the current range of 5.25%-5.50%.

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The GDP report confirmed that inflation remained low, with slight downward revisions in measures observed by the central bank for monetary policy.

„The feds may find themselves in a sweet spot,” said Jeffrey Roche, chief economist at LPL Financial in Charlotte, North Carolina. „Inflation is low, consumers are still spending, but at a slower pace. The Fed can end its rate hike campaign without much pain in the economy.”

Report by Lucia Muticani; Editing by Chisu Nomiyama, Andrea Ricci and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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