Economy Surged in Third Quarter, Growing at Annual Rate of 4.9%

The U.S. economy is on a roll, expanding at a 4.9% annual clip in the third quarter, the Bureau of Economic Analysis reported on Thursday.

It was the strongest quarterly performance since late 2021 when the economy rebounded from the lockdowns and other disruptions caused by the COVID-19 pandemic. Forecasts had called for an increase close to 5%.

The increase was driven by an increase in consumer and government spending, private investment and exports, the report said. The advance estimate of a 4.9% rate compares to 2.1% in the second quarter.

“Despite a bevy of headwinds, a resilient U.S. economy expanded at a 4.9% on a seasonally adjusted annualized pace and a 4% in household consumption,” Joseph Brusuelas, chief economist at RSM US, posted on social media.

While many economists are still forecasting a slowdown for later this year and early in 2024, the economy’s recent performance shows its resilience in the face of high interest rates and a tight labor market.

But consumers have continued spending, buoyed by savings built up during the pandemic and a strong labor market with a 3.8% unemployment rate.

It also makes life more difficult for the Federal Reserve when it meets next week to consider next steps in its campaign to bring inflation down to a 2% annual level. Consensus forecasts call for no change in interest rate policy from the Fed, but the continued strength of the economy may well put a rate hike on the table for the central bank’s December meeting.

“This quarter’s positive GDP growth, a sign that the economy has not fully slowed, will likely influence the Fed’s decision to decrease the size and frequency of rate hikes in the new year,” said Steve Rick, chief economist at TruStage. “With two meetings left to go in 2023, all eyes are watching the Fed to determine where they will go next. Easing of hikes aside, we do expect interest rates to remain high well into 2024 as inflation remains stubbornly above their 2% target.”

In another upbeat reading on the economy, the Penta-CivicScience Economic Sentiment Index released on Wednesday showed an increase of 1 point to 33.1 over the past two weeks, rebounding after falling to its lowest point since October 2022. The gain was led by increased confidence in finding a job and improvement in personal finances.

“New single-family home sales were stronger than consensus estimates as the sector has continued to improve,” said Raymond James Chief Economist Eugenio Aleman. “However, it is clear that home sellers have had to reduce prices to entice new home buyers, as both the median as well as average price of new homes came down considerably compared to a year earlier.”

On Friday, the Labor Department will issue the personal consumption expenditures price index for September. The metric is one the Fed follows closely, especially the core index that excludes energy and food costs. Analysts are looking for the overall index to show prices increased at a 3.4% annual rate and the core index at 3.7%, down from 3.5% and 3.9%, respectively.

On Wednesday, Adobe Analytics issued its monthly measure of online prices showing they continue to fall, hitting a 41-month low in September.

“Online prices in September 2023 fell 4.6% year-over-year, a 41-month low and marking over a year of YoY price decreases,” the web-tracking firm said. “Online prices fell for the majority of Adobe’s tracked categories (12 of 18) on an annual basis. On a month-over-month basis, online prices were down 0.6%.”

Key economic data on the labor market for September is scheduled for next week, with reports on job openings and the monthly employment report from the Labor Department. Last month, the number of new jobs created, 336,000, was almost twice the forecast.