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The U.S. economy expanded faster than expected in the third quarter, growing at its fastest pace in nearly two years in the latest sign of the country’s economic slowdown despite high interest rates.
Strong consumer spending was the main driver of the 4.9 percent annual increase in gross domestic product, according to preliminary figures from the Commerce Department’s Bureau of Economic Analysis.
That’s a jump from the 2.1 percent rate in the second quarter, and the strongest number since the fourth quarter of 2021. Economists on average had predicted a rate of 4.3 percent.
Many economists say that while they expect growth to slow from the third-quarter pace, the overall outlook remains strong.
“The underlying story is a resilient consumer base supported by a strong labor market,” said Eric Winograd, director of emerging market economic research at AllianceBernstein. “As long as consumers are strong, so will the economy as a whole.”
Consumer spending rose to 4 percent year-on-year from just 0.8 percent in the second quarter, with solid growth in both the goods and services sectors.
Business spending on inventories, which tend to be volatile, provided a substantial boost in the third quarter, which is likely to unwind in the fourth quarter.
Tom Simons, an economist at Jefferies, said: “Inventories set a high bar that will be difficult to cross, and as student loan payments resume, it would be shocking to see this kind of growth continue.” The repayment moratorium for student loan borrowers ends this month.
The data comes as the Federal Reserve prepares for a meeting next week to decide interest rates. The central bank is trying to use higher rates to bring inflation back to its 2 percent target without causing a sharp downturn in the economy.
Compared to monthly data such as inflation and wages, GDP figures are unlikely to affect next week’s outcome strongly.
The central bank is expected to keep rates steady at a 22-year high, giving policymakers more time to assess the effect of recent events such as their earlier rate hikes and a sharp selloff in bond markets.
Still, the growth data provide another reminder of the economy’s long-term strength and support expectations that rates will be raised for a longer period. Longer-dated 10- and 30-year Treasuries have sold off sharply in recent weeks, particularly sensitive to growth expectations.
Strong headline GDP figures can also affect consumer and business sentiment, which can have a knock-on effect on behavior and inflation expectations.
Initial market reactions to the GDP data were muted, with a modest decline in Treasury yields and a slight uptick in stock market futures immediately following the release.
The 10-year Treasury yield was down 0.04 percentage points at 4.91 percent. Expectations of central bank policy remained steady in the futures market, with investors betting there was only a 27 percent chance the central bank would raise interest rates again this year.
Some sectors of the economy have been hit by the rise in interest rates, particularly the property sector. Sales of existing homes fell to a 13-year low as mortgage rates rose in September.
Consumer spending has been more resilient this year than most economists expected, with strong retail sales data earlier this week helping to briefly push the 10-year Treasury yield to a 16-year high.
Sophia Drossos, economist at Point72 Asset Management, said rising wages and falling inflation have helped consumers.
“The pace of consumption may moderate . . . [but] If we continue to see declines in inflation while the job market remains healthy, consumers will remain firm.
Jupiter figures are based on preliminary data. The BEA will release a second estimate late next month and a third in December.