The third and final estimate for real gross domestic product (GDP) in the third quarter of 2023 was lower than initial projections, mainly because of a decline in consumer spending, according to the Bureau of Economic Analysis (BEA).
Real GDP increased at an annual rate of 4.9% in the third quarter of 2023. The reading comes below the BEA's second estimate for GDP, which showed the economy increased at a rate of 5.2% but fell in line with the initial projection for the quarter made in October.
At a 4.9% growth rate, the U.S. increased at more than twice the rate of growth in the previous quarter and puts to rest concerns of a recession this year. The solid third-quarter growth came even as the Federal Reserve raised interest rates to their highest level in years. The Fed has raised interest rates 11 times since March of last year, pushing the federal funds rate to a 22-year high of 5.25% to 5.5% to slow the economy and lower soaring inflation.
Fed Chair Jerome Powell hinted at the last interest rate meeting that Fed officials may soon be ready to reverse course on interest rate hikes.
"If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6% at the end of 2024, 3.6% at the end of 2025, and 2.9% percent at the end of 2026," Fed Chair Jerome Powell said in a statement. "These projections are not a Committee decision or plan; if the economy does not evolve as projected, the path for policy will adjust as appropriate to foster our maximum employment and price stability goals."
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U.S. economic growth this year has so far beat earlier forecasts of a recession. But the pace of economic growth has likely peaked in the third quarter, with most forecasts calling for growth to slow in the final few months of the year, Jim Baird, Plante Moran Financial Advisors' chief investment officer, said in a statement.
Whether the economy sticks a soft landing depends on how resilient the U.S. consumer remains. So far, consumer spending has squared up to high interest rates and rising prices.
"The plausibility of the soft-landing scenario hinges on consumers' continued willingness and ability to spend while inflation and interest rates recede over time," Baird said.
On an annual basis, prices rose 3.1% in November, down from 3.2% growth last month, showing that disinflation is happening, which should be helpful for consumers. That, combined with the possibility that the Fed could begin lowering rates soon, supports the narrative of a soft landing for the U.S. economy, according to Baird.
"The Q3 surge in GDP probably overstated the real strength of the underlying economy, but once again demonstrated the resiliency of consumers," Baird said. "Looking ahead, the path toward either a soft landing or recession in 2024 will likely depend on the same."
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The sharp increase in the price of necessities over the past two years has significantly impaired middle-income Americans' wallets, according to a recent Primerica survey.
The rise in food, gas, utilities and healthcare costs since May 2021 has created an average cumulative budget deficit of $2,440 in family budgets. As a result, rebuilding depleted savings and paying off debt is likely to take several more months and potentially even several years for many middle-income families.
"The compounding impact of inflation has left a deep mark on middle-income household finances," Primerica economic consultant Amy Crews Cutts said. "Over the past few years, families have repeatedly underestimated the economy's impact on their finances, such as whether they would need to use their credit cards more frequently. That's why even as inflation wanes, middle-income households are feeling increasingly less confident in their financial situations."
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