The U.S. economy continues to show remarkable resilience in the face of higher interest rates and tightening credit conditions. The Bureau of Economic Analysis' first pass revealed U.S. real GDP increased 4.9% in the third quarter, marking the strongest annualized pace since Q4-2021 when stimulus payments were in full force. The increase was widely expected in light of incredibly strong consumer spending seen over the summer. Contributing nearly 2.7 percentage points to overall growth, consumer spending increased at a 4.0% annualized pace, driven by services rising at the strongest rate since the 2021 pandemic recovery. Spending for goods also rose solidly, with spending for durable goods jumping 7.6% and spending on nondurable goods increasing 3.3%. However, last quarter's spending largely came from savings, as real disposable income declined at a1.0% annualized pace in Q3 with the saving rate falling to 3.8% from 5.2% in Q2.
Following modest accumulation in the first half of the year, inventory investment accelerated notably in Q3, returning to levels last seen during the post-pandemic inventory restocking in mid-2022. The$80.6 billion build in inventories contributed 1.3 percentage points to overall GDP growth, compared to a neutral contribution in Q2. This inventory accumulation reflects, in part, the restocking efforts amid last quarter's resilient performance for consumer goods spending. While a strong contributor in Q3, the outsized inventory investment gain is not likely to be repeated in Q4.
Business fixed investment slowed sharply during the third quarter. Reflecting the broader slowdown in goods production as well as the impact of rising interest rates and tightening credit conditions, spending on new equipment fell at a 3.8% annualized rate last quarter. Nonresidential structures spending continued to increase, climbing at a 1.6% pace, though well below the double-digit gains seen in the prior two quarters. Spending on nonresidential structures has benefited from recent legislation, including the CHIPS & Science Act and Inflation Reduction Act, which has boosted construction of electronic vehicle and semiconductor plants.
Marking the first positive performance in ten quarters, residential investment rose at a 3.9% annualized rate and likely reflects efforts from builders to speed up deliveries of homes under construction to take advantage of historically low existing home inventory. Government spending increased at a 4.6% annual rate last quarter, reflecting healthy gains in both defense and nondefense outlays. Net exports subtracted 0.1 percentage points from overall GDP growth, with exports and imports rebounding at roughly the same pace from declines in Q2.
Outside of GDP, new home sales surged 12.3% in September to a 759,000-unit annualized pace. The stronger-than-expected print highlights resilient demand despite elevated mortgage rates throughout the month. New home sales, which are measured at the time of the contract signing, reflect a timelier picture of mortgage rates than existing home sales, which are measured at the time of the closing. With current homeowners unwilling to give up their historically low mortgage rates to move, the diminished supply of existing homes has pushed more homebuyers into the new home sales market, supporting more resilient demand as evidenced by the highest level of sales since February 2022.
Looking ahead, we still believe the anticipated rise in the real fed funds rate—as the FOMC holds rates steady and inflation recedes—will likely lead to a slower pace of growth in coming quarters and a modest contraction in economic activity in Q2- and Q3-2024. That said, the degree of conviction about an outright recession is not as strong today as it was about a year ago when the FOMC was aggressively tightening monetary policy. Given the U.S. economy's surprising resilience, the Fed might be inclined to raise interest rates a touch more. However, with continued progress on inflation moving to target, alongside heightened geopolitical uncertainty and the potential for a government shutdown, we doubt the Fed will hike interest rates anymore this year.
This Week's State Of The Economy - What Is Ahead? - 21 August 2020
Wells Fargo Economics & Financial Report / Aug 18, 2020
Despite indications of lost momentum elsewhere, residential construction activity is picking up steam.
This Week's State Of The Economy - What Is Ahead? - 17 June 2022
Wells Fargo Economics & Financial Report / Jun 20, 2022
After last week\'s stronger-than-expected CPI, less surprising was the 75 point rate increase put forth by the Fed.
This Week's State Of The Economy - What Is Ahead? - 22 July 2022
Wells Fargo Economics & Financial Report / Jul 27, 2022
July\'s NAHB Housing Market Index dropped 12 points to 55, the second largest monthly decline on record behind April 2020\'s pandemic-induced collapse.
This Week's State Of The Economy - What Is Ahead? - 16 October 2021
Wells Fargo Economics & Financial Report / Oct 22, 2021
The first economic data released this week in the United States reinforced the theme that labor supply and demand are struggling to come into balance.
This Week's State Of The Economy - What Is Ahead? - 09 September 2022
Wells Fargo Economics & Financial Report / Sep 10, 2022
The ISM services index came in stronger than expected, and the underlying details pointed to service sector resilience with business activity and new orders notching their highest reading this year.
This Week's State Of The Economy - What Is Ahead? - 01 December 2023
Wells Fargo Economics & Financial Report / Dec 05, 2023
U.S. data released this week indicates the economic expansion remains alive even as inflation continues to slow. The year-ago rates of headline and core PCE inflation were the lowest since March 2021 and April 2021, respectively.
This Week's State Of The Economy - What Is Ahead? - 11 September 2020
Wells Fargo Economics & Financial Report / Sep 14, 2020
In the holiday-shortened week, analysts’ attention remained on the progress of the labor market. Recent jobless claims data remain stubbornly high and point to a slowing jobs rebound.
This Week's State Of The Economy - What Is Ahead? - 24 January 2020
Wells Fargo Economics & Financial Report / Jan 25, 2020
Fears of an escalating coronavirus outbreak reached the United States this week, as a Washington state man became the first confirmed domestic case and the international total reached more than 800.
This Week's State Of The Economy - What Is Ahead? - 08 October 2021
Wells Fargo Economics & Financial Report / Oct 15, 2021
September\'s disappointing employment report clearly takes center stage over this week\'s other economic reports. Nonfarm employment rose by just 194,000 jobs, as employers continue to have trouble finding the workers they need.
This Week's State Of The Economy - What Is Ahead? - 14 October 2022
Wells Fargo Economics & Financial Report / Oct 18, 2022
Highly anticipated Consumer Price Index report surprised to the upside. Headline CPI rose 0.4% in September, and core CPI increased 0.6%.
