The US economy expanded at an annualized rate of 2.8% in the third quarter, marking a slowdown from the 3% growth recorded in the second quarter and falling short of the anticipated 3%. This data, released on Wednesday by the Bureau of Economic Analysis, provides insight into the current state of the US economy. While the growth rate has slowed, the robust job market remains a positive sign.
The Atlanta Fed’s GDPNow model, which forecasts economic growth, had predicted a 3.3% increase prior to the release. The slower real GDP growth in the third quarter compared to the second was mainly due to a decline in private inventory investment and a larger drop in residential fixed investment. These were partially offset by stronger exports, consumer spending and federal government spending. Imports also saw an uptick.
Consumer spending increased due to rises in both goods and services. Key contributors within goods included nondurable goods, notably prescription drugs, and motor vehicles and parts. For services, health care — primarily outpatient services — and food services and accommodations drove the growth. The rise in exports was largely driven by capital goods (excluding automotive), while the increase in federal government spending was led by defense expenditures. Imports rose, mainly due to a surge in capital goods (excluding automotive).
In a separate release, the ADP National Employment report showcased a surge in private payrolls by 233,000 in October. This represents a significant acceleration from the 143,000 jobs added in September and surpasses economist expectations of 115,000. This data, which analyzes anonymized payroll data from over 25 million US employees, offers encouraging insights ahead of the official jobs report due out on Friday. It indicates that the US economy likely sustained strong job growth throughout October, despite the challenges posed by recent hurricanes and uncertainties surrounding the US elections.
The positive employment news is a bright spot in the face of the slowing GDP growth. Goods-producing industries witnessed an increase of 22,000 jobs in October, up from 8,000 added in September. Construction added 37,000 jobs, while manufacturing saw a sharper decline in positions, losing 19,000 compared to the 12,000 layoffs in the prior month. Service-providing industries demonstrated strong growth, adding 211,000 jobs, a significant jump from the 81,000 hired in September. Education and health services gained 53,000 positions, trade, transportation, and utilities added 51,000, and leisure and hospitality grew by 37,000.
The robust job market is reflected in wage growth, although it shows signs of moderation. Annual pay growth for employees staying in their roles decreased to 4.6%, continuing a two-year decline. Meanwhile, pay gains for job switchers slowed to 6.2%. “Even amid hurricane recovery, job growth was strong in October. As we round out the year, hiring in the US is proving to be robust and broadly resilient,” said Nela Richardson, chief economist at ADP.
The economic releases have sparked reactions in the market. The dollar gained strength on Thursday morning trading, with the US dollar index (DXY) rising 0.3% after the data releases. The greenback showed a more pronounced reaction to the employment statistics before consolidating its gains following the GDP release. Short-dated yields surged as expectations for a December rate cut by the Federal Reserve diminished. Yields on the 2-year Treasury bond rose by 4 basis points to 4.14%. While a 25-basis-point rate cut next week is nearly certain, implied odds for a similar move in December dropped to 70% from 75% according to CME FedWatch. Major U.S. index futures slipped after the data release, with S&P 500 futures steady and Nasdaq 100 futures down 0.1%.
The mixed economic data highlights the complexities of the current US economic landscape. While the slowdown in GDP growth may raise concerns, the robust job market offers a reassuring counterpoint. This dynamic will likely influence the Federal Reserve’s decisions on interest rates in the coming months, as policymakers strive to navigate a path towards a soft landing for the economy.
