U.S. Economy Grows at 2.8% Despite High Interest Rates, Consumer Spending Boosts Growth

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WASHINGTON — The U.S. economy expanded at an annual rate of 2.8% between July and September, driven by strong consumer spending despite high interest rates. The latest report from the Commerce Department, released Wednesday, reveals a slight slowdown from the 3% growth recorded in the previous quarter but highlights a resilient economy as Americans assess the state of the nation ahead of the presidential election.

Consumer spending, accounting for roughly 70% of U.S. economic activity, accelerated to a 3.7% pace, up from 2.8% in the prior quarter. Exports also contributed significantly, rising by 8.9%.

Business investment, however, slowed notably due to reduced spending on housing and nonresidential construction like offices and warehouses, though spending on equipment surged.

In a positive sign for inflation, the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) index, rose at only a 1.5% annual rate last quarter, down from 2.5% in the second quarter and marking its lowest level in over four years. Core PCE inflation, which excludes volatile food and energy prices, dropped to 2.2%, down from 2.8%.

The report is the first of three estimates of GDP growth for the third quarter. The U.S. economy has continued to expand in the face of elevated borrowing costs from interest rate hikes in 2022 and 2023 aimed at curbing inflation, which had surged as the economy rebounded strongly from the brief but deep COVID-19 recession in 2020. Despite widespread recession forecasts, the economy has remained robust, with steady hiring and consumer spending even as inflation eases, allowing the Fed to begin rate cuts.

Ryan Sweet, Chief U.S. Economist at Oxford Economics, noted, “This report sends a clear message that the economy is doing well, and inflation is moderating — good news for the Federal Reserve.”

President Joe Biden highlighted the progress, saying, “Today’s GDP report shows how far we’ve come since I took office — from the worst economic crisis since the Great Depression to the strongest economy in the world.”

Other indicators support the view of a steady economy. The Conference Board reported on Tuesday that consumer confidence posted its largest monthly gain since March 2021, while expectations of a recession within the next year fell to their lowest level since July 2022.

The labour market, however, has shown signs of cooling. Job openings in the U.S. fell in September to their lowest since January 2021, and employers have added an average of 200,000 jobs monthly this year, down from previous years. On Friday, the Labor Department is expected to report a job gain of about 120,000 in October, though hurricanes and a Boeing strike are expected to temper the figure.

The Federal Reserve has responded to the inflation progress by cutting its benchmark rate by a half-point, its largest cut in over four years. Another quarter-point cut is anticipated in the Fed’s upcoming meeting, with additional reductions likely in 2025 and 2026. The cumulative effect is expected to ease borrowing rates for consumers and businesses.

Source: AP