Q3 GDP Holds Steady at 2.8% Amid Mixed Consumer and Price Trends
Few anticipated the second estimate of third-quarter GDP to deliver anything particularly surprising, and indeed, expectations held firm when the data proved uneventful. Initially reported at an annualized growth rate of 2.8% in the preliminary estimate released last month, the updated figures from the Bureau of Economic Analysis confirmed the same growth rate for the quarter ending on September 30. This figure aligns with prior predictions and reflects a slight decline from the 3.0% growth recorded in the second quarter.
Delving into the specifics, personal consumption grew at an annualized rate of 3.5% quarter-over-quarter, a figure that fell marginally short of the forecasted 3.7%. Meanwhile, the GDP price index showed an annualized increase of 1.9%, slightly above the 1.8% prediction. Core personal consumption expenditures, a key measure of consumer spending excluding volatile food and energy prices, rose by 2.1% annualized, again narrowly missing the estimate of 2.2%. Gross domestic income recorded an annualized growth of 2.2% for the same period.
The BEA attributed the slight deceleration in real GDP compared to the previous quarter primarily to a downturn in inventory investment and a deeper decline in housing investment. However, these were partially offset by increases in exports, consumer spending, and federal government expenditures. Imports also accelerated during this period, which contributed to the overall GDP calculations as they are subtracted from the total economic output.
Examining the changes from the preliminary report to the second estimate, growth in the third quarter reflected notable contributions from consumer spending, exports, federal government expenditures, and business investments. While imports also rose, their status as a subtractive factor in GDP calculations tempered the overall effect.
Breaking down the contributions to GDP growth, personal consumption was the largest driver, contributing approximately 2.37 percentage points to the overall 2.8% growth figure. This marked a slight reduction from the initial estimate, which had personal consumption adding 2.46 percentage points. Fixed investment played a smaller but still significant role, contributing 0.31 percentage points, a slight increase from the 0.24 percentage points estimated initially. Private inventory changes detracted from GDP, subtracting 0.11 percentage points, though this was less of a drag compared to the first estimate of a 0.17 percentage point subtraction. Net trade was essentially neutral, with net exports reducing GDP by 0.58 percentage points, a modest adjustment from the initial estimate of 0.55 percentage points. Government spending contributed a stable 0.83 percentage points to GDP, a slight dip from the earlier 0.85 percentage point estimate.
While the GDP data offered little in the way of surprises, some analysts looked to the underlying price data for potential insights into upcoming Federal Reserve monetary policy decisions, particularly the December Federal Open Market Committee meeting. This is especially relevant as the core personal consumption expenditures (PCE) price index, a key measure of inflation closely monitored by the Fed, was set to be released shortly after the GDP report.
According to the BEA, prices for gross domestic purchases rose by 1.9% annualized during the third quarter, a slowdown from the 2.4% rise recorded in the second quarter. Excluding food and energy, prices increased by 2.4%, down from 2.6% in the prior quarter. For personal consumption expenditures specifically, prices rose by 1.5% in the third quarter, a notable deceleration from the 2.5% increase in the previous quarter. When excluding food and energy costs, the core PCE price index rose by 2.1%, a slowdown from the 2.8% rise in the second quarter, and just shy of the expected 2.2%.
Beyond the core GDP components, the report also provided updates on corporate profits. Overall, corporate earnings showed growth in the third quarter, with year-over-year profits rising by 6.1%, though this marked a slowdown from the 10.8% increase observed in the second quarter. Within the financial industry, profits declined by 0.4% quarter-over-quarter after a robust 7% increase in the prior quarter. On the other hand, Federal Reserve bank profits surged, climbing by 10.7% in the third quarter after a significant 11.5% drop in the second quarter. The nonfinancial sector also saw modest gains, with profits rising by 1.1% quarter-over-quarter, a smaller increase compared to the 4.2% growth in the second quarter.
Although the GDP data offers a comprehensive look at the economic landscape for the third quarter, its relevance has waned somewhat, as attention now shifts to more current and timely data releases. The upcoming core PCE report, scheduled for release shortly after the GDP data, is expected to provide a clearer picture of inflationary pressures and guide expectations for the Fed's next moves. As such, market participants and policymakers are unlikely to dwell on this relatively stale GDP data, focusing instead on more immediate indicators of economic momentum and price stability.