The U.S. economy grew at its fastest pace in nearly two years in the third quarter as higher wages from a tight labor market helped to power consumer spending, again defying dire warnings of a recession that have lingered since 2022.
Gross domestic product increased at a 4.9% annualized rate last quarter, the fastest since the fourth quarter of 2021, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate of third-quarter GDP growth. Economists polled by Reuters had forecast GDP rising at a 4.3% rate.
Estimates ranged from as low as a 2.5% rate to as high as a 6.0% pace, a wide margin reflecting that some of the input data, including September durable goods orders, goods trade deficit, wholesale and retail inventory numbers were published at the same time as the GDP report.
The economy grew at a 2.1% pace in the April-June quarter and is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%.
While the robust growth pace notched last quarter is unlikely sustainable, it was testament to the economy’s resilience despite aggressive interest rate hikes from the Federal Reserve. Growth could slow in the fourth quarter because of the United Auto Workers strikes and the resumption student loan repayments by millions of Americans.
Most economists have revised their forecasts and now believe that the Fed can to engineer a “soft-landing” for the economy, pointing to strength in worker productivity and moderation in unit labor costs growth in the second quarter, which they expected carried through into the July-September period.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was the main driver.
A strong labor market is providing underlying support to spending. Though wage growth has slowed, it is rising a bit faster than inflation, lifting households’ purchasing power.
Labor market resilience was highlighted by a separate report from the Labor Department on Thursday, showing the number of people filing new claims for state unemployment benefits rose to a seasonally adjusted 210,000 during the week ending Oct. 21 from 200,000 in the prior week.
The GDP data likely has no impact on near-term monetary policy amid a surge in U.S. Treasury yields and stock market selloff, which have tightened financial conditions.
Financial markets expect the Fed to keep interest rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group’s FedWatch. Since March, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range.
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