The US economy grew strongly in the third quarter, with consumer spending increasing at its fastest pace in a year and a half and inflation slowing sharply, continuing to defy gloomy expectations and outperform global peers.
The Commerce Department’s advance estimate of third-quarter GDP on Wednesday also showed strong business investment in equipment in the fourth quarter. The report was published less than a week before Americans go to the polls on November 5 to choose between Vice President Kamala Harris, the Democratic Party nominee, and former President Donald Trump.
Polls show the race is volatile, with the health of the economy at the forefront of the minds of Americans who have complained about rising food and housing costs. The economy has remained resilient despite interest rate increases of 5.25 percentage points in 2022 and 2023 by the Federal Reserve to curb inflation.
“What’s not to like?” asked Chris Lu, chief economist at FHN Financial. “Strong GDP growth supported by strong consumption and strong spending on capital equipment, all accompanied by inflation falling towards 2%.”
The Commerce Department’s Bureau of Economic Analysis said that gross domestic product rose at an annual rate of 2.8% in the last quarter. Economists polled by Reuters had expected GDP growth at a pace of 3.0%.
The economy grew at a pace of 3.0% in the second quarter.
The pace of growth was well above what Federal Reserve officials consider a non-inflationary growth rate of about 1.8%.
The BEA said it was not possible to estimate the overall impact of Hurricane Helen on GDP in the third quarter, noting that the destruction of fixed assets, such as residential and non-residential structures, did not directly impact GDP or personal income. However, it estimated that Helen resulted in losses of $39.0 billion in privately owned fixed assets and $2.0 billion in fixed assets owned by state and local governments.
Get breaking national news
For news affecting Canada and around the world, sign up to get breaking news alerts delivered to you right as they happen.
The dollar rose against a basket of currencies. US Treasury bond prices fell.
The report added to annual reviews published last month, which indicated the economy was much stronger than previously estimated. The revisions erased the gap between GDP and gross domestic income (GDI), an alternative measure of growth, during the second quarter.
Before the review, some economists had argued that the gap indicated that economic activity was overstated.
Consumer spending, which represents more than two-thirds of economic activity, grew at a rate of 3.7%. This was the fastest since the first quarter of 2021 and is up from the 2.8% pace achieved in the second quarter.
Although the labor market is slowing, layoffs are near historic lows, and wages continue to rise at a strong rate. Household net worth rose, thanks to a booming stock market and rising house prices. Savings remain high and inflation has fallen significantly, providing relief to households, especially low-income households.
The PCE price index, excluding volatile food and energy components – followed closely by the US central bank – rose 2.2%, slowing sharply from the 2.8% pace in the second quarter.
With inflation approaching the Fed’s 2% target, the central bank is now easing policy, and last month began this cycle with an unusually large interest rate cut of half a percentage point.
This reduction in borrowing costs, the first since 2020, brought the Fed’s interest rate down to a range of 4.75%-5.00%.
Business spending on equipment rose by 11.1%, the fastest since the second quarter of 2023. Government spending also increased. But the pace of inventory accumulation has slowed and the trade deficit has widened. Inventories and trade are subtracted from GDP growth.
Residential investment, which includes home construction and sales, contracted for the second straight quarter.
