US Economy Surges at 4.3% Annual Pace, Fastest in Two Years
Robust consumer spending fuels unexpectedly strong third-quarter growth, complicating the Federal Reserve's recent pivot to interest rate cuts.
The U.S. economy expanded at a surprisingly brisk 4.3% annualized pace in the third quarter, marking its most rapid period of growth in two years and defying widespread forecasts for a slowdown. The data, released Tuesday by the Bureau of Economic Analysis, significantly outpaced consensus estimates that hovered around 3.2%.
The robust performance, driven by resilient consumer spending and a strong uptick in exports, paints a picture of an economy with remarkable momentum. However, the unexpectedly strong growth creates a complex new dynamic for the Federal Reserve, which has recently shifted to an easing stance on monetary policy.
According to the report, the main engine of the U.S. economy, personal consumption, rose at a healthy 3.5% annual rate. Growth was further bolstered by an 8.8% surge in exports and increased government spending. This strong reading crushes estimates and challenges the narrative of an economy rapidly losing steam under the weight of past interest rate hikes.
This growth spurt complicates the outlook for monetary policy. The Federal Reserve, citing a softening labor market and moderating inflation, has already implemented three consecutive interest rate cuts, bringing its target federal funds rate down to a range of 3.5% to 3.75% as of its December meeting. The strength shown in the third quarter, coupled with inflation that remains above the central bank's 2% target, could give policymakers reason to pause or signal a higher-for-longer rate outlook.
The Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, registered a 2.8% annual pace in the quarter, with the core measure that strips out food and energy prices at 2.9%. While down from their peaks, these levels of inflation may prove stubborn if economic activity remains this strong.
The data comes amid other signs of economic blending. The unemployment rate, for instance, has ticked up to 4.3% in the third quarter, a key metric that has supported the Fed's recent dovish tilt.
Looking ahead, economists are skeptical that the third quarter's torrid pace of growth can be maintained. Projections for the fourth quarter suggest a significant deceleration. The Survey of Professional Forecasters from the Philadelphia Fed indicates an anticipated slowdown to a GDP growth rate between 1.0% and 1.5%.
For now, the market is left to digest a blockbuster growth number that, in ordinary times, would be cause for celebration. But in the current environment, it serves as a powerful reminder of the unique and challenging cross-currents facing the world's largest economy and its central bank.