U.S. third-quarter GDP growth fell short of expectations, with consumer spending being the biggest highlight

The Zhitong Finance APP noted that preliminary estimates released by the U.S. government on Wednesday showed that the inflation-adjusted annualized GDP growth for the third quarter was 2.8%, down from 3% in the previous quarter. The median forecast from a Bloomberg survey of economists was 2.9%.

The U.S. economy experienced strong growth in the third quarter due to accelerated household purchasing power ahead of the elections and increased federal government defense spending.

Consumer spending, which accounts for the largest share of economic activity, grew by 3.7%, marking the largest increase since the beginning of 2023. The main reason for the accelerated economic growth was the increase in goods spending. Consumer spending, which constitutes the largest share of economic activity, rose by 3.7%, the largest increase since early 2023. This growth was driven by widespread increases in various goods such as automobiles, home goods, and entertainment products.

Meanwhile, data from the U.S. Bureau of Economic Analysis showed that the closely watched core inflation indicator rose by 2.2%, roughly in line with the Federal Reserve's target.

As the Federal Reserve begins to unwind its tightest monetary policy plan in decades, the U.S. report indicates strong domestic demand momentum. This is also the last report before the elections, where U.S. voters will assess the overall state of economic activity based on their financial situations, which have been troubled by high living costs in recent years.

High Frequency Economics economists Carl Weinberg and Rubeela Farooqi stated in a report: "There is hardly any issue here. The economy just needs to achieve interest rate normalization steadily at a moderate pace, that's all."

Following the GDP data and another ADP employment report showing strong growth in private sector hiring in October, U.S. Treasury yields and the dollar rose.

The GDP for the third quarter was constrained by fluctuations in trade data, which showed that net exports contributed 0.56 percentage points to revenue. Due to concerns over a prolonged dockworker strike, retailers increased their imports of consumer goods as the quarter was coming to a close Inventory also contributed 0.17 percentage points to revenue.

Business Expenditure

However, the indicator favored by economists for measuring potential growth trends—combining consumer spending and business investment—rose by 3.2%, marking the largest increase this year.

Government spending increased by 5% month-on-month, with federal spending seeing its largest increase since early 2021. Defense spending surged by 14.9%, the largest increase since 2003. Federal government spending, excluding defense, experienced the fastest growth in a year.

Non-residential fixed investment increased by 3.3% month-on-month, the lowest level in a year, and was dragged down by construction spending. However, bolstered by the transportation sector, business equipment spending reached its highest level since the second quarter of 2023.

Spending on computers and related peripherals skyrocketed by 32.7%, the largest increase since 2020, indicating that artificial intelligence is continuing to thrive.

Due to the real estate market struggling under the pressure of high mortgage rates and prices, residential investment annualized declined by 5.1%, the largest drop since the end of 2022.

These data should lead the Federal Reserve to continue lowering interest rates in the coming quarters, including at next week's meeting. This data is good news for Vice President Kamala Harris, who is in the final days of campaigning against former President Donald Trump.

However, economic growth has been uneven in recent years, as profits as a share of income have remained far above historical standards. GDP data shows that the annualized growth rate of inflation-adjusted after-tax personal income is 1.6%, the smallest increase in a year.

Economist Eliza Winger stated, "The GDP data for the third quarter makes the economy look strong, but the situation beneath the surface is unstable. Consumer spending, which is a major driver of growth, is only slightly boosted by high-income households, while low-income households have become more sensitive to prices."

The U.S. Bureau of Economic Analysis will release detailed third-quarter corporate profits and employee compensation next month, along with its second estimate of GDP for that period