Economic growth expanded at a 5.2% seasonally adjusted annual rate in the third quarter of this year, the strongest growth since the pandemic rebound and, before that, 2014.
The Bureau of Economic Analysis reported the updated estimate of GDP on Wednesday. The GDP numbers, which are adjusted for inflation, represent an upward revision from the initial reading of 4.9% growth. Two more revisions will be made over the coming months as analysts get a better picture of how the economy performed during the third quarter.
“Net, net, real economic growth was even faster than we thought last quarter, but early indications point to a slowdown where there’s simply not as much wind in the economy’s sails in the final quarter this year,” said Chris Rupkey, chief economist at FWDBONDS. “The consumer’s tapped out with inflation, the resumption of student loan payments and higher consumer debt levels expected to take a toll on spending in the final quarter of the year.”
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The rise in GDP is good news for the economy’s overall health, although it complicates things a bit for the Federal Reserve, which has been raising interest rates for more than a year to drive down the country’s hot inflation.
After more than a year of successive interest rate increases, some by very aggressive margins, the Fed opted to pause its hiking at its last meeting. Although officials eschewed another rate revision, the Fed’s target rate is still the highest it has been since the dot-com bubble, at 5.25% to 5.50%.
Higher interest rates put downward pressure on GDP, which is a measure of the country’s overall economic activity. The Fed is hoping that demand cools off a bit so prices fall, but the hot GDP reading shows that economic growth is seemingly defying gravity.
The high rates are still expected to dampen demand in the coming months, even if the Fed is done tightening. However, there are concerns the central bank could induce a recession by having rates so high.
Typically, two back-to-back quarters of negative GDP growth are taken as a rule of thumb to indicate a recession. That the GDP was positive in the first and second quarters and now expanded again by an even wider margin in the third quarter bodes well for the country side-stepping a recession. Still, if the Fed decides to keep rates at their current level for longer, it raises the chance that GDP starts to take a whack.
As a result of the Fed’s tightening, inflation has meaningfully declined. The consumer price index is running at 3.2%, which, while above the Fed’s 2% goal, is much lower than the historic highs last year.
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The Fed’s next meeting is set for mid-December. The overwhelming majority of Fed watchers think the central bank will hold its target rate steady at 5.25% to 5.50%.
Investors see a nearly 99% probability that the Fed will not hike rates at this meeting, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
