U.S. Economy Grows Faster than Expectations

Good News! U.S. Economy Grows faster than expectations, despite the fear of recession which was always around the corner from the last year. The Economy grew faster than expected. On 29^th November, 2023, the Bureau of Economic Analysis (BEA), released the Third Quarter GDP data and the data from the Bureau of Economic Analysis (BEA) reveals a resilient economy driven by increased consumer spending, inventory investments, and exports. In this Article we will have a look at what data talks about and what it means to economy.

Gross Domestic Product (Second Estimate) Third Quarter 2023

According to the “Second” estimate, in the third quarter of 2023, Real Gross Domestic Product (GDP) increased at an annual rate of 5.2%.  Real GDP has increased by 2.1% in the second quarter. The increase in the third quarter is mainly due to increase in consumer spending and inventory investments. Increase in exports were balanced by a deceleration in non-residential fixed investments. Imports are increased – which are a subtraction in the calculation of GDP. 

GDP at Current-Dollar has increased at an annual rate of 8.9% (or $ 581.5 Billion) in the third quarter. This is an upward revision from $ 20.9 billion in previous estimate to a level of $27.64 trillion in the present estimates. 

Source: U.S. Bureau of Economic Analysis

The Gross Domestic Purchases Price Index has increased to 3.0% while the Private Consumption Expenditure (PCE) price index, a gauge inflation which the Federal Reserve observe closely, has increased to 2.8% (this is downward revision of 0.1%) in the third quarter. The Core PCE (i.e. excluding Food and Energy prices) price Index has increased by 2.3% which is a downward revision of 0.1%.

Personal Income

Personal Income at Current-dollar increased to $218.3 billion in the third quarter – this is an upward revision of $18.8 billion from the previous estimate. This increase in the third quarter is primarily attributes to increase in compensation (led by private wages and salaries), personal interest income (which was balanced by decrease in personal transfer receipts) and non-farm proprietors income. 

Disposable Personal income has increased to $ 144.0 billion (i.e. 2.9%) in the third quarter – this is an upward revision of $48.2 billion from the previous estimate. 

Real disposable personal income (adjusted to inflation) has increased by 0.1% – an upward revision of 1.1%. 

Savings

In the third quarter the personal saving was $815.4 billion – an upward revision of $51.0 billion from the previous estimate. 

The personal saving rate – personal saving rate as a percentage of disposable personal income – was 4.0%, this is an upward revision of 0.2%.

Gross Domestic Income

In the third quarter, the Real Gross Domestic Income (GDI) has increased by 1.5% compared to an increase of 0.5% in the previous (i.e. second) quarter.

The Average of Real GDP and Real GDI – a supplemental measure of U.S. economic activity which equals in terms of weights with GDP and GDI – has increased 3.3% in the third quarter compared to 1.3% (revised figure) in the previous (i.e. second) quarter. 

What this means to economy – Our Perspective and take from the data

This means the economy has shown greater resilience and growing stronger. Thanks for consumer spending and investments. The present growth rate is one of the quickest in almost two (2) years. If there is an argument, which normally happens, that we should see GDP growth from income side and not expenditure side even then the economy has shown a moderate growth rate if not such a stronger one. 

The third quarter data is more convincing for policymakers that there is more possibility now for soft landing. Even though the Federal Reserve’s gauge inflation has increased it has a downward revision. This is one of the positive step that inflation is moving towards the Federal Reserve’s long-term inflation target of 2%. This also means there is a possibility for another pause, if not reduction of interest rates, from the Federal Reserve. 

On 28^th November, 2023, the Governor Michelle W. Bowman (member of the Board of Governors of the Federal Reserve System) in her speech on “Reflections on the Economy and Monetary Policy” stated that “There are several uncertainties surrounding my baseline outlook that will influence my view of appropriate monetary policy going forward.”

She state many important issues on her speech and but here are four major points from her speech which provides us more insight on how Fed looks at the economy as a whole

• The improvement in inflation during these past year was mainly attributed to supply-side improvements like increase in labor force participation, lower energy prices and increasing supply chain.  She also stated that “It is unclear whether further supply-side improvements will continue to lower inflation”.
• Due to increase in work visa issuance for some immigrants and better labor force participation the number of workers in labor force has increased. But, Job gains has slowed and vacancies have declined. This shows that there will be a better balance from labor supply and demand. 
• It has to be noted that prior to the pandemic, goods consumption comprised just under one-third of overall consumption. 

However, there is a risk to inflation from higher services consumption. The Governor Bowman stated in her speech that the demand for services may be one of the biggest contributor to the importunately high core services inflation.

So all is well? 

Yes, as of now from the third quarter data it seems all is well. However, it is not free from any worrisome factors. And these worrisome factors are so big that anything can go wrong before soft landing. Here are the list of few worrisome factors for the economy 

• Surging U.S Debt – Fiscal Consolidation has to be done sooner or later in order to have control Debt surge. When it is done how the economy is going to react on it – that has to be seen. 
• Uncertain reaction from the economy – Yes, it has to been how the economy is going to react for the Federal Reserve’s action, to increase its higher interest rates over the past two years to tackle inflation, and tighter financial conditions.
• Labor/Job Market – Labor market is gradually slowing down. Unemployment rates were higher in October than a year earlier in 223 of the 389 metropolitan areas, lower in 137 areas, and unchanged in 29 areas, the U.S. Bureau of Labor Statistics reported on 30^th November, 2023.
• How long is too long – it is yet to be seen how the Fed is going to act after seeing the third quarter data and how long it is going to hold the Fed funds rate higher as well as when it’s going to reduce it.

Conclusion

The third quarter data paints a positive picture of the U.S. economy, showcasing resilience and strength fueled by consumer spending and investments. Despite a potential soft landing on the horizon, uncertainties remain, including surging U.S. debt, reactions to Federal Reserve actions, and concerns about the labor market. As policymakers assess this data, the trajectory of interest rates and economic stability hangs in the balance.

FAQs