The U.S. economy expanded by 2.8% quarter-on-quarter (q/q, annualized) in the third quarter, a touch lower than the consensus forecast of 3.0%.
Consumer spending accelerated at its fastest pace since the first quarter of 2023, rising 3.7% q/q. The gain was driven by a sharp rise in goods spending (+6.0% q/q), while spending on services grew by 2.6%.
Business investment rose 3.3% q/q, thanks to another strong quarterly gain in equipment spending (+11.1% q/q). Meanwhile, spending on structures fell by 4.0% q/q, while investment in intellectual property products was relatively flat – up just 0.7% q/q – for the second quarter in a row.
Residential investment (-5.1% q/q) remained a drag on Q3 growth, as both home sales and homebuilding came under further pressure alongside still elevated interest rates.
Government spending rose 5.0% q/q – its strongest quarterly gain in a year – largely stemming from an outsized gain in federal defense outlays (+14.9% q/q). State & local government spending (+2.3% q/q) was also higher last quarter.
On international trade, both imports (+11.2% q/q) and exports (+8.9% q/q) notched sizeable gains, but a larger increase in the former resulted in net trade subtracting 0.6 pp from GDP. Inventory investment (-0.2 pp) was also a small net drag on growth last quarter.
Final domestic demand was up a healthy 3.5% q/q, an acceleration from Q2’s gain 2.8% q/q.
Core PCE inflation – the Fed’s preferred inflation gauge – slowed to 2.2% q/q (annualized), a notable deceleration from Q2’s 2.8%.
Key Implications
Another solid quarter for the U.S. economy, with underlying domestic demand pushing well above 3% and accounting for all of last quarter’s growth. Beyond the housing market, there are very few signs that elevated interest rates are exerting any meaningful drag on domestic activity.
That said, economic growth is likely to round out the year on a softer note, as a further cooling in the labor market leads to some moderation in consumer spending. Equipment investment also looks poised for some giveback after two consecutive quarters of very healthy gains, while Q3’s gain in federal defense spending is unlikely to repeated in Q4. We also can’t forget that fourth quarter growth is likely to see some distortions stemming from hurricane’s Helene and Milton, which have likely displaced some near-term activity across parts of the Southeast. However, history shows that the clean-up and rebuilding efforts that occur following a natural disaster tend to more than offset any lost output.
Bigger picture, the U.S. economy still looks poised to achieve a soft landing. Economic growth is expected to steady closer to 2% in 2025, while inflation is quickly closing in on the Fed’s 2% target. This should allow the FOMC to continue gradually reducing its policy rate over the next year, and potentially have it return to closer to its long-run neutral rate of 3% by Q4-2025.
