| Real GDP growth remained healthy in Q3 2024. The US economy expanded by 2.8 per cent annualized in the third quarter, slightly above our 2.5 per cent annualized forecast, but slightly below consensus estimates, which anticipated roughly 3 per cent growth. |
| Consumers drove growth, again. Given continued strength in real disposable income growth and a healthy labour market, consumers continued to drive much of the expansion in the quarter. Real consumer spending rose by an outsized 3.7 per cent annualized, very close to our projections, driven by material spending on both goods and services. Among goods, households spent heavily on big-ticket items like cars, furniture, and recreational equipment, as well as on clothing and shoes. Consumers did spend more on food, but less on gasoline. Among services, consumers spent money on both necessities like health care, housing, and transportation costs and discretionary services like food, hotels, and recreation. |
| Business investment held up another quarter. Nonresidential investment continued to rise in Q3 despite reduced CEO optimism more recently. Importantly, the quarterly gain was more broadly based compared to prior quarters as firms purchased tech, industrial and transportation equipment and IP. Investment in structures fell, weighed down by declines in commercial and health care, power and communication, mining, and other structure (e.g., education, lodging) buildings. While factory building investment slowed, growth remained positive, and construction of land transportation infrastructure continued to grow. Investments in these types of construction are consistent with US industrial policies supporting the reshoring of factories and domestic infrastructure building. |
| Residential investment is surprising to the downside. Residential investment fell for a second consecutive quarter, declining by 5.3 percent annualized in Q3, after experiencing a sizable downward revision to Q2 investment. Investment fell for new single- and multi-family structures, and commissions and ownership transfer costs for existing homes were also down. Investment in manufactured homes, which was outsized in the first half of 2024, was flat in Q3. One bright spot is that spending on home improvements continued to rise at a healthy pace. |
| Inventory accumulation was slightly less than expected. The overall change in real inventories was somewhat less than expected and resulted in a net drag in Q3. While retail trade inventory building remained elevated as companies accelerated imports ahead of the East- and Gulf-Coast port strikes, stockpiling of manufacturing and wholesale goods was slower. |
| Duelling trade activity caped Q3 expansion. Net exports were a drag on the economy, but mainly because import growth (8.3 per cent annualized) continued to outpace export growth (4.9 per cent annualized. Since mid-2023 trade has been on the upswing, but outsized domestic demand is causing imports to expand at a far more rapid pace than exports. |
| Government spending continued to boost growth. Government consumption and investment continued to bolster real GDP growth in the third quarter. The contribution from the government to real GDP growth has been positive and sizable every quarter since mid-2022. Indeed, mid-2022 marked the final piece of legislation supporting US industrial policies. Starting in late 2021, congress passed three bills that supported greater investment in infrastructure, R&D, chips, and activities related to the green transition at the federal state and local levels. These types of investments tend to have large multipliers in the short run and boost productivity growth over the longer run. The legislation also resulted in the “crowding-in” of private investment in the US and from abroad, which also supported US economic growth over the last few years. |
| Headline PCE inflation is now just above the 2-percent target. Total PCE deflator inflation cooled to 2.1 per cent year-over-year in September, the slowest rate of annual increase since February 2021. Easing in the overall measures reflects continued declines in goods prices, especially for gasoline, cars, furniture, recreational goods, and assorted other durable goods. Food prices are still contributing to upward pressures on inflation but to a lesser extent compared to a year ago. |
| Core PCE inflation remains a tad sticky. The slower pace of easing in inflation less food and energy reflects a slower pace of cooling in services costs. Shelter costs remain a sizable contributor to year-over-year inflation, but this is shrinking consistent with past calming in home prices, which is projected to continue. Labour shortages that are driving up wages are keeping inflation for some services like restaurants elevated. Structural changes, including an ageing population, more high-tech cars, and repeated natural disasters are inflating insurance costs. Despite these pressures, we continue to anticipate inflation to stabilize at 2 per cent sooner than the Fed’s Summary of Economic Projections suggests. |
| For the full document click the link below: |
| United States of America: Strong Growth, Slowing Inflation, Fed Dilemma |
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