A frenzy of summer spending on travel and entertainment drove real GDP growth to an unsustainable pace in the third quarter. A narrowing trade deficit and modest build up of inventories also added to the topline figure.
We expect consumption to slow in 4Q given elevated inflation, high interest rates and the resumption of student-loan repayments. The Fed’s tightening cycle is taking time to hit the real economy, but we believe higher mortgage rates, credit-card debts and business-loan defaults will hit growth this quarter.
What we expect in the Oct. 26 release:
- Real 3Q GDP likely grew at a 4.9% annualized pace (vs. 2.1% prior), surpassing the consensus estimate of 4.5%. The narrower trade deficit and inventory build up likely added 1.3 percentage point to overall growth.
- The Fed has raised its benchmark rate by a cumulative 5.25 percentage points to slow the economy, and it’s likely that some of the long and variable lags of monetary policy on the economy have yet to fully play out.
- Pent-up post-pandemic demand for services led consumers to overspend in 3Q. A large chunk of that strength came from temporary factors – the “Barbenheimer” summer blockbusters, and concert tours by Taylor Swift and Beyonce — as well as factors that don’t necessarily reflect underlying strength, such as a build up of retail inventories.
- Nonresidential fixed business investment likely already slowed to about 2.5% (vs. 7.4% prior). With capital spending intentions at their lowest level since June 2020, core capital investment continued to weaken.
- Net trade narrowed, but not for good reasons. Exports increased, boosted by vehicles, while imports declined — particularly of industrial supplies. A drop in imports suggests slowing domestic demand. Moreover, imports would have been even weaker if not for autos.