October 30, 2024
The US economy continues to outpace the rest of the world, growing 2.8 percent in the third quarter. This puts its year-over-year growth at 2.7 percent. By comparison, most other wealthy countries are barely seeing any growth at all.
Not only is the US economy outpacing its peers, its growth considerably exceeds the projections made before the pandemic. In January of 2020, the Congressional Budget Office projected that GDP would be 8.6 percent higher in the third quarter of 2024 than it had been in the fourth quarter of 2019. With today’s release, GDP is now 11.4 percent higher than in 2019, a gap of 2.8 percentage points.
Non-residential investment is the category where growth has most exceeded projections. In the third quarter, it was 18.0 percent higher than its pre-pandemic level, more than 5.0 percentage points above the 13.0 percent growth that had been projected.
Strong Third Quarter GDP Growth Should Mean Another Quarter of Strong Productivity Growth
Hours worked grew at roughly a 1.0 percent annual rate in the third quarter. Value-added in the non-farm business sector increased at a 3.5 percent annual rate in the quarter. This would translate into another quarter of above 2.0 percent productivity growth.
The continued rapid growth of productivity (growth averaged just over 1.0 percent in the decade before the pandemic) means that we should be able to see more rapid growth in living standards and we need have less concern about inflation. If we sustain productivity growth of 2.0 percent, nominal wage gains rise at a 4.0 percent rate (roughly their current pace) while keeping inflation at the Fed’s 2.0 percent target. This is even if we don’t see some reversal of the shift from wages to profits that we saw in the pandemic.
Consumption Grew at a 3.7 Percent Rate, with Durable Goods Consumption Leading the Way
Consumption spending added 2.46 percentage points to growth in the quarter. Consumption of durable goods showed the most rapid growth, increasing at an 8.1 percent annual rate. Service consumption grew at a slower 2.6 percent rate but accounted for 1.21 percentage points of the growth in the quarter.
Within services, nominal spending on health care rose at just a 4.9 percent annual rate, only slightly faster than the 4.7 percent growth in nominal GDP in the quarter. The slower growth of health care spending since the pandemic has kept Medicare and other public health care spending below projections, and left more money to spend in other areas.
Within the durable goods category, purchases of motor vehicles had the most rapid gain, rising at a 9.7 percent annual rate in the quarter.
Non-Residential Investment Rises at a 3.3 Percent Rate, Driven by a Surge in Equipment Investment
Equipment investment grew at an 11.1 percent rate in the quarter. By contrast, investment in intellectual products grew at just a 0.6 percent rate, and investment in structures fell at a 4.0 percent rate. This reverses prior patterns, investment in structures had been growing at more than a 6.0 percent rate in the first quarter and was growing at double digit rates in 2023.
Structure investment has been driven largely by a surge in factory construction. This slowed in the current quarter, with construction of manufacturing facilities rising at just a 2.2 percent annual rate. However, even with the slow growth in the third quarter, factory construction has risen by an incredible 111 percent from its pre-pandemic level. This surge is directly attributable to the CHIPS Act and the Inflation Reduction Act, which led to a surge in factory construction to build semiconductors as well as green technology items.
Residential Investment Edges Downward
Residential investment fell at a 5.1 percent rate, the second consecutive decline after surging 13.7 percent in the first quarter. We will likely see housing construction largely treading water barring a major change in interest rates or regulatory policy. Starts are roughly back to their pre-pandemic level and builders have worked through their pandemic backlogs created by supply-chain problems.
Inventories and Trade Both Subtracted from Growth
Inventory growth subtracted 0.17 percentage points from the quarter’s growth, while a rise in the trade deficit reduced the growth rate by 0.56 percentage points. We accumulated inventories at a $60 billion annual rate in the third quarter, which is near the recent average, meaning that there is little reason to expect inventory changes to be a major factor in growth in future quarters.
The trade deficit increased as an 11.2 percent rise in imports outweighed an 8.9 percent increase in exports. The main story here is that the US economy is growing considerably more rapidly than the economies of our trading partners, causing our purchases from them to rise more rapidly than their purchases from us.
Defense Spending Rises at a 14.9 Percent Rate, Driving 5.0 Percent Growth in Government Spending
The timing of defense spending is often erratic, but it has been outpacing overall GDP growth over the last year. It added 0.51 percentage points to growth in the quarter. Non-defense federal spending grew at a 3.2 percent rate, while state and local spending grew at a 2.3 percent rate.
Inflation Back at Fed Target
The overall PCE deflator rose at just a 1.5 percent annual rate in the quarter, while the core index increased at a 2.2 percent rate. Over the last year they have increased by 2.3 percent and 2.7 percent, respectively. The current quarter’s data, coupled with the continued strong growth on productivity, should make the Fed confident that it has achieved its inflation target.
Another Very Strong Report
It is hard to find much not to like in this GDP report. Growth is healthy and balanced, productivity growth remains strong, and inflation looks to be very much under control.
There are always unexpected events that affect the economy. The storms that hit the south earlier this month will likely affect the October employment data and also be somewhat of a hit to fourth quarter GDP. And wars elsewhere can have a large impact. But the overall economic picture here is hard to complain about.
