The United States economy surged in the third quarter as a strong job market and falling inflation gave consumers the confidence to spend freely on goods and services.
Gross domestic product, the primary measure of economic output, grew at a 4.9 percent annualized rate from July through September, the Commerce Department reported Thursday. The pace exceeded forecasts and was the strongest showing since late 2021, defying predictions of a slowdown prompted by the Federal Reserve’s interest rate increases.
The acceleration was made possible in part by slowing inflation, which lifted purchasing power even as wage growth weakened, and a job market that has shown renewed vigor over the past three months.
Although the growth rate is an initial estimate that may be revised as more data comes in, it’s a far cry from the recession that many had forecast at this time last year, before economists realized that Americans had piled up enough savings to power spending as the Fed moved to make borrowing more expensive.
“There’s been an enormous increase in wealth since Covid,” said Yelena Shulyatyeva, senior economist for the bank BNP Paribas, referring to recent Fed data that showed median net worth climbed 37 percent from 2019 to 2022. “People still take not just one vacation, not just two, but three and four.”
That level of spending by higher-income earners in turn fueled robust job growth in service industries like hotels and restaurants even as sectors that benefited from pandemic shopping trends, like transportation and warehousing, returned to more normal levels.
There are indications that consumers are running out of dry powder. Disposable personal income, adjusted for inflation, decreased in the quarter, as did the personal savings rate.
But with layoffs still near record lows, workers have little reason to hold off on making purchases, even if it means using borrowed cash — an increasingly pricey option as interest rates drift higher. Retail sales have risen in recent months, as have credit card balances.
One beneficiary of those open pocketbooks is Amanda McClements, who owns a home goods store in Washington, D.C., called Salt & Sundry. Sales are up about 15 percent from last year and have finally eclipsed 2019 levels.
“People can’t get enough candles; that continues to be our top seller,” Ms. McClements said. They are also “entertaining more post-pandemic, so we do really well in glassware, tableware, beautiful linens.”
Ms. McClements said business hadn’t been uniformly strong, though: Her plant store, Little Leaf, never snapped back from the depths of the pandemic, and it will close this year. “We’ve been experiencing a really uneven recovery,” she said.
While consumers propelled the bulk of the economy’s growth in the third quarter, other factors contributed as well. Government spending continued to fuel growth, particularly in defense, with the restocking of weapons and ammunition after transfers to aid Ukraine. And for the first time in two years, residential investment provided a boost even in the face of higher interest rates: Those who already own homes have little incentive to sell, so newly constructed homes are the only ones on the market.
“The third quarter would be that sweet spot where higher mortgage rates kept people in place, builders capitalized on the lack of existing supply, and that showed up as an improvement from prior quarters,” said Bernard Yaros, lead U.S. economist at Oxford Economics.
The report offered mixed signals for the Fed ahead of its policymaking meeting next week. Although overall growth was torrid, the rate of price increases was slightly lower than expected, indicating that inflation might have been weaker in recent months than previously understood.
“They do want to see the consumer starting to slow down from here,” said Oscar Munoz, chief U.S. macro strategist for TD Securities. “They can be patient right now for that to happen; they can wait a little bit because inflation through the summer was very tame.”
Also, one category hampering growth — nonresidential business investment in equipment — indicates that interest rate increases are slowing large purchases. Rising inventories added 1.3 percentage points to the overall number as companies stockpiled goods, but that’s not generally seen as a sustainable source of growth.
Most economists expect that the acceleration in economic activity will be brief. Pitfalls loom in the fourth quarter, including the depletion of savings, the resumption of mandatory student loan payments and the need to refinance maturing corporate debt at higher rates.
But for now, the United States is outperforming other large economies, in part because of its aggressive fiscal response to the pandemic and in part because it has been more insulated from impact of the Ukraine war on energy prices.
“We’re talking about the eurozone and U.K. certainly looking like being on the cusp of recession, if not already in recession,” said Andrew Hunter, deputy U.S. economist for Capital Economics, an analysis firm. “The U.S. is still the global outlier.”
Jeanna Smialek contributed reporting.
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