The actual GDP of the United States grew by 2.8% quarter-on-quarter in the third quarter, which was below expectations, while the core PCE price index rose by 2.2% quarter-on-quarter, exceeding expectations

The U.S. economy showed robust but slightly disappointing growth momentum in the third quarter, with consumer spending exceeding expectations. Meanwhile, inflation continued to cool but remained above expectations, adding further evidence of the U.S. economy heading towards stagflation.

On the evening of the 30th, the U.S. Department of Commerce released data showing that the annualized quarter-on-quarter real GDP for the third quarter was 2.8%, below the expected 2.9%, and down from the previous value of 3%. Notably, this is the first time this indicator has fallen below market expectations since the third quarter of 2023.

Following the data release, the yield on the 2-year U.S. Treasury bond, which is sensitive to interest rates, rose briefly. The market largely expects the Federal Reserve to cut interest rates by 25 basis points at the November rate decision.

Consumer Growth Hits Highest Level in Six Quarters, Government Spending Grows Rapidly, Trade Drags Down

Economic growth in the third quarter was mainly supported by the consumer sector, with positive effects from the growth in exports and federal government spending.

In terms of consumption, U.S. consumer spending grew by 3.7% quarter-on-quarter in the third quarter, marking the largest increase since the second quarter of 2023.

Both goods and services consumption expenditures increased:

The main contributors to goods consumption growth were other non-durable goods (led by prescription drugs) and motor vehicles and parts (led by used light trucks);

The main contributors to services consumption growth were healthcare (led by outpatient services) as well as food services and accommodations.

Another major driving factor was federal government spending, which increased by 9.7% in the third quarter, driven by a 14.9% surge in defense spending. However, the continued growth in government spending has also led to a budget deficit exceeding $1.8 trillion for the fiscal year 2024.

Trade has dragged down economic growth. In the third quarter, imports grew by 11.2% (this portion is subtracted from GDP), offsetting the economic increment brought by an 8.9% increase in exports.

In a Stagflation Environment, Where is the Federal Reserve's Rate Path Heading?

Inflation continues to cool but remains above expectations. The annualized quarter-on-quarter initial value of the core Personal Consumption Expenditures (PCE) price index for the third quarter was 2.2%, significantly down from 2.8% in the second quarter, aligning with the Federal Reserve's inflation target but exceeding the market expectation of 2.1%.

Economic growth unexpectedly slowed, with inflation and consumption higher than expected. In this chaotic backdrop of stagflation, the uncertainty surrounding the Federal Reserve's continued interest rate cuts has intensified.

Nevertheless, the majority of the market expects that the Federal Reserve will lower the federal funds rate by another 25 basis points during its two-day monetary policy meeting on November 7-8, to prevent further deterioration of the labor market