US GDP grew at a 4.9% annualized pace in the third quarter, better than expected

The US economy grew faster than expected in the third quarter, buoyed by a strong consumer base despite high interest rates, ongoing inflationary pressures and various domestic and global interventions.

Gross domestic product, a measure of all goods and services produced in the U.S., rose at an annualized pace of 4.9% in the July-September period, up from an unrevised 2.1% pace in the second quarter. Department of Commerce said Thursday. Economists polled by Dow Jones had expected a 4.7% acceleration.

This sharp increase was due to contributions from consumer spending, increased inventories, exports, residential investment and government spending.

Consumer spending, measured by personal consumption expenditures, rose 4% in the quarter after rising just 0.8% in Q2. Total private domestic investment rose 8.4% and government spending and investment rose 4.6%.

Spending at the consumer level is evenly split between goods and services, with the two measures accounting for 4.8% and 3.6% respectively.

Markets reacted little to the news, with stock market futures opening negative and Treasury yields mostly lower.

The increase represents the largest gain since the fourth quarter of 2021.

At a time when many economists thought the U.S. would be in the midst of at least a shallow recession, growth is on pace thanks to consumer spending that has exceeded all expectations. Consumers accounted for 68% of GDP in Q3.

Despite the end of the Covid-19 government cash transfer payments, spending remains strong as households reduce savings and rack up credit card balances.

These gains come despite the Federal Reserve not only raising rates at the fastest clip since the early 1980s, but also pledging to keep rates high until inflation returns to an acceptable level. Price increases have been running well above the central bank’s 2% annual target, although the rate of inflation has eased in recent months.

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Along with rates and inflation, consumers deal with a variety of issues.

Resuming student loan payments are expected to take a bite out of family budgets, while elevated gas prices and a wobbly stock market are hitting confidence levels. Geopolitical tensions also pose potential headaches, with the conflict between Israel and Hamas and the war in Ukraine creating considerable uncertainty about the future.

While the U.S. has proven to be facing various challenges, most economists expect growth to slow significantly in the coming months. However, they generally think the U.S. can avoid a recession without any other unexpected shocks.

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