GDP Growth Misses Forecast as U.S. Economy Expands by 2.8% in Q3

The U.S. economy posted a 2.8% annualized GDP growth rate in the third quarter of 2023, slightly below the 3.1% that economists had projected.

This latest report from the Commerce Department reflects continued resilience in economic activity, although GDP growth has moderated from the 3% pace in Q2.

Consumer spending, a major driver of the economy, remains steady, while increased government outlays continue to provide substantial support amid inflation and high-interest challenges.

Consumer Spending and Federal Expenditure Propel Growth

Consumer activity, which represents roughly two-thirds of the U.S. GDP, grew by 3.7% in Q3, marking the strongest spending rate since the first quarter of 2023.

Despite high inflation and elevated borrowing costs, Americans have continued to spend, though with a reliance on savings and credit.

Federal spending also surged, with a 9.7% rise in Q3, bolstered by a 14.9% increase in defense outlays.

This public expenditure provided a critical cushion for growth, reinforcing economic stability amid persistent inflationary concerns.

Trade Dynamics Limit Overall Growth

While domestic demand drove much of the growth, trade dynamics partly offset these gains. Imports, which are subtracted from GDP calculations, jumped 11.2%, counteracting an 8.9% increase in exports.

This rise in imports, alongside export growth, reflects ongoing shifts in trade flows influenced by factors like tariffs and global energy costs.

Inflation and Fed’s Interest Rate Outlook

With the economy still expanding, the Federal Reserve faces a complex path forward in its inflation strategy.

The personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, increased by just 1.5% for the quarter, below the 2% target and down from a 2.5% rise in Q2.

However, core PCE, excluding volatile food and energy prices, rose by 2.2%, which remains slightly above the Fed’s comfort zone.

This leaves the central bank with decisions on interest rates, which many expect could see another quarter-point cut when the Federal Reserve meets in early November.

Mixed Market Reaction and Election Backdrop

Market responses to the GDP report were mixed, with stock futures pointing to a mixed opening, while Treasury yields also showed little overall movement.

The economic data arrives against the backdrop of a highly competitive U.S. presidential election season.

Economic stability, including steady GDP growth, has featured prominently in campaign discussions.

President Kamala Harris has highlighted ongoing growth as a positive sign for the economy, while former President Donald Trump has focused his messaging on inflation’s lingering effects on household budgets.

Public sentiment appears split on the state of the economy. Although inflation has cooled since its 2022 peak, voters remain concerned about its impact on personal finances.

The personal savings rate, which dipped to 4.8% from a revised 5.2% in Q2, underscores the financial adjustments Americans are making amid ongoing cost-of-living pressures.

Economic Outlook and Sustained Growth Challenges

The Commerce Department’s report is the first of three estimates for Q3, with subsequent revisions likely to provide further insight into the economy’s resilience and challenges.

The reliance on government spending as a key growth driver has raised questions about the sustainability of this current cycle, especially as the national budget deficit climbs beyond $1.8 trillion in fiscal 2024.

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