Economy Ran Even Hotter in Third Quarter as GDP Updated to 5.2% Rate, Surpassing Forecasts

The economy was even hotter in the third quarter than initially believed, according to an update Wednesday from the Bureau of Economic Analysis.

Gross domestic product grew at an annual pace of 5.2%, up from the initial estimate of 4.9%. Increased investment and government spending drove the higher estimate. Economists had predicted a 5% number.

“Even hotter: real GDP expanded by +5.2% (q/q ann.) in 3Q23, up from initial estimate of +4.9% … personal consumption revised lower while business investment revised higher,” Liz Ann Sonders, chief investment strategist at Charles Schwab, posted on social media.

It was the strongest quarterly growth, outside of the pandemic recovery in 2020, in a decade.

“The update primarily reflected upward revisions to nonresidential fixed investment and state and local government spending that were partly offset by a downward revision to consumer spending,” the BEA said, “Imports, which are a subtraction in the calculation of GDP, were revised down.”

The economy is projected to slow in the current quarter and possibly fall into recession sometime in 2024. The Federal Reserve Bank of Atlanta’s GDPNow forecast calls for 2.1% annual growth in the fourth quarter, up from 2% on Nov. 17.

The key question will be the strength of the consumer, who accounts for about 70% of the U.S. economy. Record online spending over the Thanksgiving holiday period is a good omen for the critical retail season. Consumers spent a record $12.4 billion on Cyber Monday, with spending that topped $15 million a minute in the final hour of the day. Monday’s spend was 9.8% higher than a year ago.

“Ultimately, excess savings accumulated during the pandemic helped boost consumer spending and delay the onset of recession,” BCA Research wrote on Wednesday. “However, the tailwind from excess savings is ebbing. Its trajectory – captured by either the San Francisco Fed or BCA Research’s US investment strategy – suggests that excess savings will be exhausted at some point next year which bodes ill for the economic outlook.”

A key factor will be the strength of the labor market. As long as people have jobs, they are likely to continue spending. Next week, the government will report the monthly jobs number for November. Though there has been a noticeable downward trend in the number of jobs created, the labor market remains in an expansive mode.

The outsized performance in the third quarter is likely to concern the Federal Reserve when it meets next month, but markets still believe the central bank is done increasing interest rates. On Thursday, the government will release the personal consumption price expenditures index for October – a metric that is closely followed by Fed officials.

Overall, inflation is coming down, but at 3.2% last month it still remains well above the Fed’s 2% annual target. The Fed will release its “beige book” summary of the economy later Wednesday.