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? - 06 January 2023
Wells Fargo Economics & Financial Report / Jan 12, 2023
During December, payrolls rose by 223K while the unemployment rate fell to 3.5% and average hourly earnings eased 0.3%. Job openings (JOLTS) edged down to 10.46 million in November.
July 2020 Economy At A Glance
Wells Fargo Economics & Financial Report / Jul 30, 2020
The recent surge in COVID-19 cases indicates that elected officials re-opened the economy too soon, that too many Americans are flaunting social distancing guidelines, and that the virus is likely to be around longer than we’d hoped.
How Long Can US Businesses Remain Shut Down?
Wells Fargo Economics & Financial Report / Apr 29, 2020
The sudden stop in economic activity caused by the COVID-19 pandemic means that many businesses will need to rely on their cash reserves to survive the next few months.
This Week's State Of The Economy - What Is Ahead? - 23 October 2020
Wells Fargo Economics & Financial Report / Oct 24, 2020
A recent strong report from the National Association of Homebuilders set the tone for another round of strong housing data. The NAHB index rose two points to a record high 85.
This Week's State Of The Economy - What Is Ahead? - 10 March 2023
Wells Fargo Economics & Financial Report / Mar 14, 2023
Financial markets were looking for validation that January\'s unexpected strength was not a fluke and that the downward slide in economic momentum experienced late last year had stabilized.
September 2020 Economy At A Glance
Wells Fargo Economics & Financial Report / Sep 19, 2020
A March survey by the Federal Reserve Bank of Dallas found most exploration firms need West Texas Inter-mediate (WTI) at $49 per barrel or higher to profitably drill a well.
This Week's State Of The Economy - What Is Ahead? - 15 January 2021
Wells Fargo Economics & Financial Report / Jan 18, 2021
Retail sales fell 0.7% in December, the third straight monthly decline. Sales are still up 2.9% over the year, however.
This Week's State Of The Economy - What Is Ahead? - 06 March 2020
Wells Fargo Economics & Financial Report / Mar 07, 2020
An inter-meeting rate cut by the FOMC did little to stem financial market volatility, as the number of confirmed COVID-19 cases continued to climb.
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? - 09 April 2021
Wells Fargo Economics & Financial Report / Apr 10, 2021
This week\'s economic data kicked of with a bang. The ISM Services Index jumped more than eight points to 63.7, signaling the fastest pace of expansion in the index\'s 24-year history.
