News & Analysis

The US economy expanded by 4.9% annualised in Q3, beating economist expectations for a 4.5% print. Uncertainty around the release was particularly high, with the range of estimates spanning 2.8% to 6.0%.

Growth in the US has been strong since 22Q3, and while the economy was gradually losing momentum until 23Q2, each print over that period had exceeded 2%. Similarly to the latest PMI data, today’s GDP release continues to support the US exceptionalism narrative, but even so, the market reaction was somewhat muted. This may be explained by the fact that traders have been paying closer attention to the Atlanta Fed’s GDPNow model, which has consistently called the direction of the surprise for more than two years running. However, it may also be that despite today’s overshoot, almost no one expects a repeat in Q4.

Consumption rebound drives Q3 growth surge

Looking in more detail at today’s release, growth in the third quarter was primarily driven by a sizable upturn in consumption, which expanded at a 4% annualised pace after slowing to 0.8% in Q2.

As a result, consumption accounted for 2.7 percentage points, or 55% of the overall expansion in the economy. The consumption breakdown reveals that spending was broad based, with both goods (+4.8%) and services (+3.6%) accelerating considerably from the previous quarter. In particular, durable goods (+7.6%) led the charge following a slightly negative reading, but non-durables posted a respectable +3.3% gain. The two other main drivers of growth were private inventory investment (+80.6bn) and fiscal spending (+4.6%), with respective 27% and 16% contributions to the overall gain, while housing investment and exports offered limited positive support. To the downside, imports (+5.7%) and nonresidential investment (-0.1%) were the only components to deliver a negative contribution to growth, while state and government spending offered less of a boost than in the previous quarter. Curiously, net trade was a drag on growth in Q3, with the rise in exports more than offset by a larger increase in imports, despite some suggestions pre-release that this would offer a significant upward support to GDP numbers this quarter. Admittedly though, this was one major source of uncertainty heading into today’s release, with the advance trade data being released simultaneously with the GDP figures instead of a day or two earlier as usual.

Although Q3 GDP data likely received a temporary consumption boost from a handful of blockbuster movie releases and major concerts, Q4 looks set to face not only the reversal of these tailwinds but growing temporary headwinds as well.

The resumption of student loan repayments began on October 1st, foreboding a small but still uncertain consumption drag, while workers’ strikes in the health care and automotive sectors are likely to further weigh on growth. All of this will only be amplified by dwindling excess savings, of which roughly 80% have been depleted. At the very least, some consumers began to repay their loans ahead of schedule, which could smooth out the impact on consumption, while news yesterday reported that the UAW auto union and Ford arrived at a tentative deal, suggesting that October may be worse than the rest of Q4. Today’s report also contained several interesting nuggets suggesting the economy is set to hit a speedbump. Personal saving as a percentage of disposable personal income dropped to just 3.8%, well below the roughly 5% long run rate, suggesting that the current consumer spending binge is likely unsustainable. So to the decline in real disposable incomes, which fell by 1% in Q3, something that should weigh on consumer demand moving forwards. All together, this points to growth slowing sharply in Q4, even in spite of today’s very strong headline number. Therefore, while the Q3 growth numbers continue to see the US economy stand out, especially against the eurozone where a recession looks imminent, FX markets have barely budged given this is unlikely to be repeated.




Nick Rees, FX Market Analyst

Jay Zhao-Murray, FX Market Analyst


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