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Strong Consumer Demand Keeps US Economy Going, but Will It influence the Fed?

Published 10/31/2024, 03:41 AM
  • The U.S. GDP rose 2.8% in Q3.
  • Economic growth was sparked by a spike in consumer spending.
  • Will it impact the Fed's decision on interest rates?

The PCE for the quarter rose just 1.5%, while consumer spending spiked.

The economy grew 2.8% in the third quarter as measured by the gross domestic product (GDP), according to the latest report from the U.S. Bureau of Economic Analysis (BEA).

The GDP was down slightly from 3% growth in Q2, but above the FactSet consensus estimate of 2.6% growth.

The BEA also released the personal consumption expenditures (PCE) numbers for the third quarter, and it showed prices increased only 1.5% from the second quarter. The core PCE, which excludes food and energy prices, was up 2.2% in Q3, down from a 2.8% hike in Q2.

The monthly PCE index results for September are set to be released this morning.

With above average economic growth and sinking inflation rates, has the Federal Reserve achieved its soft landing? To this point, it would appear that the Fed’s strategy has delivered the desired results, although it remains a tightrope, with slower economic growth expected in 2025.

Consumer spending surges as confidence increases

The strong economic growth in the quarter was mainly due to higher consumer spending, increased exports, and a spike in federal government spending.

The 3.7% increase in consumer spending was the biggest gain since the first quarter of 2023 and made up 2.5% of the 2.8% increase in GDP. There were solid increases in both goods and services.

Within goods, spending on nondurable goods, particularly prescription drugs, and motor vehicles and parts, led the way. Within services, the leading contributors were health care, led by outpatient services, along with food services and accommodations.

The rise in exports reflected an increase in goods, led by capital goods, while the uptick in federal government spending was boosted by higher defense spending.

“Consumption was stronger than expected and prices were lower than expected, which is good news for inflation,” Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research, said.

This tracks with the sharp rise in consumer confidence, as detailed in the Conference Board’s report on Tuesday. The Consumer Confidence Index spiked to 108.7 in October, up from 99.2 in September.

The Present Situation Index, based on current conditions, increased by 14.2 points to 138, while the Expectations Index, based on consumers’ short-term outlook, rose by 6.3 points to 89.1. The latter is above the threshold of 80 that usually signals a recession ahead.

“Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years,” Dana Peterson, chief economist at The Conference Board, said.

Will it influence the Fed?

Today, the BEA will release the PCE inflation report for September, and economists target a 2.1% 12-month increase, which would be down from 2.2% in August.

The 2.1% rise would also put the Fed’s preferred inflation gauge just one tick above its 2% target.

If it indeed moves lower, as expected, and in line with the lower Q3 PCE rate, it should spur the Fed to lower rates again at its meeting on November 7.

According to the CME FedWatch survey, almost 97% of interest rate traders expect a 25-basis point reduction in November, while only 3% expect no rate cuts. Also, 0% anticipate another 50-basis point drop.

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