The US economy expanded by a solid 2.8% in the third quarter, showcasing its resilience despite a slight slowdown from the previous quarter’s 3% growth rate. While the GDP growth fell short of expectations, the figure highlights the robust nature of the US economy amid a backdrop of rising interest rates and global uncertainties. A closer look reveals a mix of factors driving this growth, with consumer spending and a surprising surge in defense spending leading the charge.
Mohamed El-Erian, Allianz advisor and president of Queen’s College, coined the term “U.S. economic exceptionalism” to describe this performance. Despite growth slightly below expectations, he emphasizes that the US economy outperforms other advanced nations due to strong consumer spending and robust federal budgetary expenditures. Personal consumption increased by a significant 3.7% in the third quarter, marking the highest rate since the beginning of 2023. Additionally, a 14.9% surge in defense spending fueled the expansionary fiscal impulse.
Jeffrey Roach, chief economist at LPL Financial, also points to the unusual spike in defense spending as a significant factor in the third quarter growth. However, he expresses caution regarding its sustainability. “Defense spending spiked almost 15% annualized, the highest since 2003 and will likely revert next quarter,” Roach notes. Despite this potential short-term boost, Roach remains optimistic about the durability of consumer spending, considering it the real anchor of growth. He further highlights that investment in the technology sector is fueled by the “A.I. craze”, driving increased capital expenditures.
Inflation data for the third quarter offers a mixed picture. Core PCE, the Federal Reserve’s preferred measure of inflation, increased slightly more than anticipated. Goldman Sachs chief economist Jan Hatzius acknowledges the solid growth composition but notes that the upward nudge in core inflation led the firm to raise its September core PCE estimate to 0.26%. This would place core PCE at 2.65% and headline PCE at 2.09% on an annual basis.
Bill Adams, chief economist at Comerica Bank, underscores the significance of the third quarter’s growth, marking the sixth consecutive quarter of annualized growth exceeding 2.5%. This is the longest such streak since 2006. Adams predicts a quarter-point rate cut by the Fed after Election Day.
Jamie Cox, managing partner for Harris Financial Group, views the third-quarter report as an ideal scenario for the Federal Reserve, with solid growth accompanied by moderating inflation. “Growth up, inflation down is precisely what you want to see,” Cox emphasizes, highlighting that a steady growth rate paired with easing inflation allows the Fed more flexibility in easing interest rates.
However, James Thorne, chief market strategist at WellingtonAltus, argues for a more proactive approach from the Fed, suggesting “front-loading interest rate cuts” to counter potential economic deceleration. He anticipates interest rate declines to 2.75%, considering the Fed’s current stance too high given the cooling economic trajectory. Thorne advocates for a 50-basis-point cut to counteract the “downward momentum in the economy.”
The US economy continues to demonstrate resilience, but the path ahead remains uncertain. The Federal Reserve’s response to inflation and the sustainability of consumer spending and defense spending will be crucial factors in determining the trajectory of the US economy in the coming months.
