Economic Growth Unexpectedly Decelerated In Third Quarter

Key Takeaways

• The GDP grew at an annual rate of 2.8% in the third quarter, a slowdown from the prior quarter.
• The deceleration was due to a drop in housing investment, which outweighed an acceleration of consumer spending.
• Overall, the economy was running smoothly and consumer price increases were relatively small.

The U.S. economy grew in the third quarter, although slower than expected, as the stagnant housing market dragged down the country’s overall output.

The inflation-adjusted Gross Domestic Product grew at an annual rate of 2.8% in the third quarter, decelerating from 3% growth in the second quarter, the Bureau of Economic Analysis said Wednesday. That was less than the 3.1% forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.

A 5.1% drop in residential investment dragged growth down. However, consumer spending rose 3.7%, the fastest growth since the first quarter of 2023.

In a good sign for consumers’ buying power, the economy grew faster than price tags did. The cost of living, as measured by Personal Consumption Expenditures, grew at a 1.5% annual rate in the third quarter, down from 2.5% in the second.

Despite Slower Growth, This Could Be Good News For The Fed

The continued growth, especially the uptick in consumer spending and tame inflation, suggests the economy is running smoothly for the time being and that the Federal Reserve’s efforts to subdue inflation while preserving the job market are going well.

“Though GDP is backward-looking, it sends a clear message that the economy is doing well, and inflation is moderating, good news for the Federal Reserve,” Ryan Sweet, chief economist at Oxford Economics, wrote in a commentary.

The GDP report is one of the last pieces of data the Fed will digest before deciding whether to cut interest rates at its next meeting in November. Financial market participants widely expect the Fed to cut its benchmark rate by 0.25 percentage points, putting downward pressure on borrowing costs for all kinds of loans. The GDP report left those expectations largely unchanged, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

“The Fed will need to continue to emphasize a more gradual pace of rate cuts from here if it doesn’t want to ignite a growth and inflation scare down the road, especially if fiscal policy is set to loosen in 2025,” wrote BMO Capital Markets Chief U.S. Economist Scott Anderson.

The Fed, which had hiked its interest rate sharply in 2022 to combat high inflation, started rolling it back from its two-decade high in September, seeking to boost the economy and prevent a spike in unemployment.

Housing Market is a Drag on the Economy

The GDP report also highlighted the drag the housing market is having on the overall economy.

Soaring prices and high mortgage rates have made houses unaffordable to buyers with typical incomes, quashing homebuilding and worsening a longstanding housing shortage. It was the second quarter in a row that housing market activity fell and at a sharper rate than the 2.8% drop in the second quarter.

Wednesday’s report was an advance estimate of GDP, and the bureau will revise it twice more before arriving at a final figure for the third quarter in December.

Update: This story has been updated to include Personal Consumption Expenditures and commentary from BMO Capital Markets.