The U.S. economy grew at a healthy clip in the third quarter despite very weak labor conditions in the third quarter, according to projections from economists.
The Bureau of Economic Analysis releases the delayed initial estimate of the inflation-adjusted gain in gross domestic product during the quarter at 8:30 a.m. Eastern on Tuesday. The report was originally scheduled for Oct. 30; the government shutdown forced the delay.
The consensus call among economists surveyed by FactSet is that real GDP grew at an annualized rate of 3% from July to September, driven by solid consumer spending and a boost from trade. The range of calls is wide. As of Dec. 16, the Atlanta Fed’s GDPNow model estimated real GDP growth of 3.5% in the third quarter, down slightly from the 3.6% growth estimate on Dec 11. On the other end, the New York Fed’s NowCast model estimates growth of just 2.3%.
The forecast is a bit softer than the 3.8% rebound in GDP growth seen in the second quarter. Still, it’s expected to be better than the 0.6% decline logged in the first quarter due to a surge of imports that businesses implemented ahead of higher tariffs.
While a critical economic barometer, Tuesday’s GDP data isn’t expected to have much impact on the Federal Reserve’s rate policy. Officials are instead focused on the risks to the U.S. economy posed by weak job growth and rising unemployment against inflation levels that are persistently above the Fed’s 2% target.
Tuesday’s report will also include the official calculation of inflation during the third quarter as measured by the personal consumption expenditures price index and any revisions around that data. Typically, the quarterly GDP is released before the last month of PCE inflation is released. Due to the delay, September’s price growth was released on Dec. 5. PCE inflation increased by 2.8% year over year in September.
Economists expect that the third-quarter gain in GDP was driven by a solid advance in consumer spending. Monthly real consumer spending data through September suggests third-quarter growth was 2.7%, meaning it should contribute 1.8 percentage points to headline growth, calculates David Doyle, head of economics at Macquarie Group.
“We know that consumer spending eclipsed the second quarter by a slight margin, as services spending continued to be supported by high-income earners and spending on nondurables ramped up meaningfully,” writes the economics team at the Royal Bank of Canada.
Trade data also pointed to slightly weaker imports in the third quarter, while export growth was likely more resilient—resulting in stronger net trade, a key component of the GDP calculation. The trade deficit narrowed by nearly 11% to $52.8 billion in September. That is the lowest level since April 2020. Exports increased by 3% and imports rose by a modest 0.6% for September.
While some of the rise in exports in September reflects gold exports that don’t directly impact GDP, the higher overall gain in net exports is expected to provide a substantial boost to third-quarter economic growth. Paul Ashworth, chief North America economist at Capital Economics, estimated that net trade will add 1.5 percentage points to overall GDP.
The level of business inventories, however, is shaping up to be another wild card, much like they have been in previous quarters this year. When companies add to their inventories, it is a positive contribution to economic output. But if businesses significantly draw down their stores, it can be a drag on GDP. Residential investment is expected to exert a modest drag on growth, while government spending is expected to see a tepid gain.
Fixed business investment will be another much-watched component of GDP growth, particularly in regards to software investment and information processing equipment. Both are expected to remain robust for the third quarter, though growth will likely be more moderate than the second-quarter boom. That moderation “may be a favourable development as it will limit the extent to which AI-related investment becomes a stretched and a structural risk,” Macquarie’s Doyle writes.
It is worth noting that while the government shutdown affected the release time of third-quarter GDP data, the expected drag on economic activity from the funding lapse would show up in fourth-quarter data since the shutdown started on Oct. 1 and ran until Nov. 12.
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