US GDP - The Fed's tight monetary policy has not yet prevented the economy from accelerating above trend. But growth is set to slow. The first GDP estimate for 3Q23 published by the US Bureau of Economic Analysis showed an acceleration in economic growth to 4.9% SAAR after 2.1% in 2Q23. This is a record pace since the end of 2021 (at that time, the rapid growth rates were associated with the post-covid recovery) and above the consensus forecast (4.3%). The Atlanta Fed's model also predicted an acceleration in the growth of the US economy in 3Q to 5.4%. The details of the report show several interesting points: the main contribution was provided by the increase in consumer spending of households; a significant contribution was made by the increase in investment in inventories (this is a temporary factor), while the more stable growth of investment in fixed assets slowed down significantly. The economy was also supported by the growth of government spending (military spending outpaced growth), while the external sector made a small negative contribution. The data confirmed the stability of the American economy to the record-breaking cycle of interest rate increase by the Federal Reserve System since the 80s - instead of the traditional slowdown, it continues to grow at a rate above the historical trend (1.8%) and even accelerated growth. At the same time, the inflation indicators targeted by the Fed behaved differently - the PCE price index accelerated growth to 2.9% compared to 2.5% in 2Q23 (which was probably influenced by rising energy prices), while the Core PCE slowed to 2.4% compared to 3.7% in the previous quarter.
The decline in core inflation to its lowest levels since 4Q20 with strong economic growth is a good signal, confirming the hope for a soft landing. However, this pace of growth is not expected to be sustainable and is expected to shift to a slowdown in 4Q23 and especially in 2024 as the lagged effects of rising borrowing costs and student loan repayments take hold. According to the Fed, for a sustained slowdown in inflation, the economy must grow at a below-trend rate for some time and labor market conditions must become less tight. Recently, Fed Chairman J. Powell reiterated that additional evidence of above-trend growth in the U.S. economy or an end to the "overheating" labor market adjustment may require further tightening of the MPC. However, the "mitigating" circumstance for the Fed is the tightening of financial conditions, expressed in particular in the increase in yields of long-term government bonds. Thus, the yield on 10-year USTs is near 5%, the maximum for the last 16 years.
Since the acceleration of the US economy growth in 3Q was expected and is still considered as temporary, most likely, this data will not affect the Fed's decision next week (October 31-November 1). Judging by the CME futures quotes, the market is waiting with almost 100% probability for the rate to remain at the current level of 5.25-5.5%. But if the 4Q data do not show the expected slowdown in business activity, the probability of a rate hike at the December meeting may increase (so far the market estimates this probability low, about 24%). But even if the Fed Funds rate has already peaked, strong economic data is an argument for keeping it at a restrictive level for longer. This is only the first estimate of 3Q GDP, it will be revised twice more and the revisions are often very substantial.
Strong consumer demand is at the heart of the expected acceleration of the US economy growth. Household final consumption accelerated to 4% (highest since 4Q21) after a weak 0.8% in 2Q23. Growth in consumption of goods accelerated most significantly (+4.8% after an "anemic" 0.5% a quarter earlier). Consumption of durable goods increased particularly strongly (+7.6%), although this type of goods is considered to be the most sensitive to the increase in interest rates and the stage of the economic cycle. However, consumption of current goods and consumption of services also showed good growth (+3.3% and +3.6%, respectively). Consumption of housing and utilities services, healthcare, transportation and financial services, restaurants and travel increased most notably. The pent-up demand for cars was replaced by purchases of goods and services for recreation. The contribution of household consumption to economic growth amounted to a solid 2.7 p.p. Consumption growth is supported by favorable conditions in the labor market (wage growth), as well as the use of savings (the savings rate decreased from 5.2% to 3.8% of disposable income. However, personal income growth has become the lowest in the last few quarters (0.9% vs. 1.1% in 2Q23 and 1.7% in 1Q23), with taxes rising. Disposable personal income growth slowed to 0.5% vs. 1.5% in 2Q23 and 3.7% in 1Q23. Interest payments are also rising.
Fixed asset investment (excluding housing) declined for the first time since 3Q21, down -0.1% (vs. a 7.4% increase in 2Q23), primarily due to a decline in equipment investment (-3.8%), but real estate investment turned to growth for the first time since early 2021 (+3.9%). Typically, real estate and business investment are considered to be the sectors of the economy most sensitive to the Fed's interest rate being in the restrictive zone (which the Fed believes it is already in). In 3Q23, investment in fixed assets made a very modest contribution to GDP dynamics (+0.15 p.p.). But a strong contribution (+1.32 p.p.) was made by investments in inventories. Such growth is usually considered as temporary and "inverted" in the next period.
Foreign trade made a weakly negative contribution to GDP dynamics (-0.08 p.p.).
Public expenditures made a notable contribution to GDP growth (in the amount of 0.79 p.p.), with their growth accelerating to 4.6% compared to 3.3% in 2Q23. In particular, military spending growth accelerated to 8% compared to 2.3% in 2Q23. Meanwhile, the election of a little-known Trump supporter as Speaker of the House of Representatives, after a long period of "powerlessness", brings back the threat of a fierce partisan fight in Congress and a recurrence of the threat of a shutdown after the temporary budget expires in mid-November. All of this could have a dampening effect on government spending in 4Q23.
This is only the first estimate of US GDP for 3Q23 and will be revised twice more.
