American economic outperformance continued into the third quarter as the first estimate of U.S. gross domestic product showed a 2.8% increase.
The gains were driven by robust household spending, which increased by 3.7%, strong nonresidential investment, which rose by 3.3% featuring a robust 11.1% rise in spending on productivity-enhancing equipment, and government consumption, which rose by 5% including a 14.9% increase in defense spending.
Read more of RSM’s insights on the economy and the middle market.
For the past nine quarters—since the third quarter of 2022—the U.S. economy has expanded at an average rate of 2.9%, which is well above the long-run trend of 1.8%. That strong pace has been driven by full employment and wage gains that have exceeded inflation over the past 18 months.
It’s not just traditional measures of growth that reflect the resilience in the American economy. Alternative metrics of growth are strong as well, with real final sales increasing by 3%, gross domestic purchases by 3.3%, final sales to domestic purchasers by 3.5% and final sales to private domestic purchasers by 3.2%.
We expect that the combination of firms pulling forward economic activity into the third quarter and the impact of Hurricanes Helene and Milton will cause a deceleration of growth back toward 2% to 2.5% in the final quarter.
Still, the U.S. economy is firing on all cylinders and unless there is a large external shock or domestic policy error, it is poised to close out the year on a strong note.
While we anticipate the Federal Reserve will cut its federal funds policy rate by an additional 25 basis points at its meeting next week and again in December, there is a risk that the central bank could slow the pace of rate cuts as it reassesses the long-term outlook for an economy at full employment.
From our vantage point, the economy is capable of growing faster than the 1.8% trend embedded in the Federal Reserve’s Summary of Economic Projections, and that implies that the current 2.9% terminal policy rate may need to be revised upward.
The data
Household spending was strong across the board with outlays on goods advancing by 6%, durable spending increasing by 8.1%, nondurables by 4.9% and services by 2.6%.
Outlays on goods were linked to the pulling forward of spending to avoid possible supply chain disruptions and should be expected to ease in the current quarter.
Gross private investment increased by 0.3%, which is a tale of two narratives.
The first is the robust 3.3% increase in nonresidential investment, which featured that gaudy 11.1% increase in spending on equipment, a 0.6% increase in spending on intellectual property and a 4% decline in outlays on structures.
The second is a 5.1% decline in residential investment, which is a reflection on the lagging impact of elevated interest rates.
That lag will modestly improve as interest rates come down and is sure to be a major part of the economic narrative next year as investors and policymakers focus on the spring and summer building season.
Exports increased by 8.9% and imports advanced by 11.2%. Strong domestic demand for cheaper foreign goods as real wages rise resulted in a larger-than-anticipated trade deficit, which acted as a 0.56% drag on overall growth.
Federal spending increased by 9.7%, nondefense spending rose by 3.2% and state and local spending increased by 2.3%.
Inventory accumulation increased by $60.2 billion, which was down from $71.1 billion and resulted in a 0.17% drag on overall growth.
The takeaway
The U.S. economy continues to show strength, with full employment, price stability and strong productivity gains.
We expect that growth will moderate back toward 2% to 2.5% in the final quarter. With the unemployment rate standing at 4.1% and with a sustained increase in wage gains above inflation over the past 18 months, the household sector will continue to support a strong spending outlook. In addition, smart supply side polices will continue to produce economic benefits.
