Real GDP expanded by 4.9% quarter-over-quarter (q/q, annualized) in the third quarter of 2023 – more than double the rate of expansion seen in the second quarter. The reading came in slightly ahead of the consensus forecast, which called for a still healthy gain of 4.5%.
Consumer spending grew by 4.0% – a sharp acceleration from the 0.8% recorded in the second quarter. Gains were spread across both goods (+4.8%) and service (+3.6%) expenditures.
Non-residential business fixed investment was flat last quarter, as modest gains in structures (+1.6%) and intellectual property products (+2.6%), where offset by weaker equipment spending (-3.8%).
Residential investment (+3.9%) posted a small gain, snapping what had been nine consecutive quarters of declines.
Government spending increased 4.6%, as spending at both the federal (+6.2%) and state & local (+3.7%) level moved higher. Federal outlays were seen across both defense (+8.0%) and non-defense spending (+3.9%).
Inventory investment added a meaningful 1.3 percentage points to headline growth – the strongest pace of inventory accumulation in three quarters.
Net exports shaved just a tenth of a percentage point from GDP, as strong growth in exports (+6.2%) was more than offset by a healthy gain in imports (+5.7%).
The core PCE deflator rose 2.4% on a q/q (annualized) basis – a deceleration from 3.7% in Q2.
Key Implications
An absolute blockbuster reading for third quarter real GDP, with solid gains seen across nearly all components of spending. At this rate, even if the economy were to completely stall in the fourth quarter, economic growth would still expand by 2.3% this year – slightly stronger than last year’s 1.9% and an equivalent rate of expansion to 2019 when interest rates were far lower.
Despite the recent strength, it’s important to not become complacent with the economy’s recent resilience. Several headwinds including the ongoing United Auto Workers strike, the resumption of student loan repayments, and the potential for a government shutdown come mid-November could lead to a considerable drag on near-term activity. This is happening at time when financial conditions have tightened significantly over the past few months and the real effective policy rate has become increasingly more restrictive alongside some easing in inflationary pressures. We expect growth to decelerate somewhere close to 1% in Q4, before slipping to a near stall speed through the first half of next year.
