US GDP Grows by 4.9% in Third Quarter 2023
The US economy expanded at its fastest pace in nearly two years in the third quarter of 2023, driven by strong consumer spending and business investment, according to the Commerce Department’s Bureau of Economic Analysis (BEA).
Gross domestic product (GDP), the broadest measure of economic activity, increased at an annualized rate of 4.9% in the July-September period, the highest since the fourth quarter of 2021, when it grew by 5.1%. The latest figure exceeded economists’ expectations of a 4.3% growth rate.
The robust performance reflected the resilience of the economy amid aggressive interest rate hikes by the Federal Reserve, which has raised its benchmark rate four times this year to combat inflation. The Fed is expected to keep rates unchanged at its next policy meeting on October 31-November 1.
Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth, rising by 3.6% in the third quarter, compared with 2.8% in the previous quarter. Higher wages from a tight labor market and lower taxes boosted household income and spending power.
Business investment also contributed to growth, increasing by 6.2%, up from 4.4% in the second quarter. Nonresidential fixed investment, which includes spending on equipment, structures and intellectual property products, rose by 7.9%, while residential fixed investment declined by 4.0%.
Government spending also added to growth, rising by 2.5%, with both federal and state and local spending increasing. However, net exports subtracted from growth, as imports grew faster than exports, reflecting a strong domestic demand and a widening trade deficit.
The BEA also reported that inflation moderated in the third quarter, with the price index for gross domestic purchases increasing by 1.9%, down from 3.8% in the second quarter. The personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, rose by 2.6%, down from 4.1%. Excluding food and energy prices, the core PCE price index increased by 3.8%, down from 4.9%.
The third-quarter GDP estimate is based on incomplete or revised data and may be subject to further changes. The second estimate, based on more complete data, will be released on November 29.
The outlook for the fourth quarter is less optimistic, as some factors that boosted growth in the third quarter may fade or reverse. The United Auto Workers strikes that affected several automakers in September and October are expected to weigh on output and employment. The resumption of student loan repayments by millions of Americans after a pandemic-related moratorium may also dampen consumer spending.
Most economists have revised their forecasts and now believe that the Fed can engineer a “soft landing” for the economy, avoiding a recession while slowing down inflation. They point to the strength in worker productivity and moderation in unit labor costs growth in the second quarter, which they expect to continue in the third quarter.
However, some risks remain, such as the uncertainty over the debt ceiling and fiscal policy, the supply chain disruptions and labor shortages that hamper production and delivery, and the potential impact of new variants of the coronavirus on public health and economic activity.
The Conference Board, a business research group, projects that real GDP will grow by 2.2% in 2023 and then fall to 0.8% in 2024, reflecting a slowdown in consumer spending, higher interest rates, lower government spending and rising consumer debt. The Congressional Budget Office (CBO), a nonpartisan agency that provides economic analysis for Congress, forecasts that real GDP will grow by just 0.1% in 2023 and then average 2.4% from 2024 to 2027.
