US Economy Exceeded Expectations in the Third Quarter, However Current GDP Estimates Experience Significant Decline

The US Economy Exceeds Expectations in Q3, but Current GDP Estimates Decline

New data from the Bureau of Economic Analysis (BEA) reveals that the US economy experienced better-than-expected growth in the third quarter of 2023, with a revised GDP of 3.4 percent. This marks six consecutive quarters of positive economic growth, leading some analysts to suggest that the Federal Reserve may be on track for a successful “soft landing,” where they can cool the economy and bring down inflation without causing a recession. However, real-time GDP estimates for the first quarter of 2024 have seen a significant decline, indicating that the strength of the third-quarter numbers may be a thing of the past.

The Federal Reserve Bank of Atlanta’s GDPNow Model initially predicted 3.2 percent growth for the January–March period, but this estimate has dropped to 2.1 percent as of March 26. Similarly, the New York Fed Staff Nowcast projected 2.8 percent GDP growth for Q1, but this has fallen to 1.9 percent. The St. Louis Fed real GDP Nowcast currently expects 1.33 percent growth, slightly down from the previous month’s estimate of 1.4 percent.

Despite these declining estimates, economists at The Conference Board have abandoned their recession call. Various business activity indicators, as well as labor market and consumer sentiment data, have been moving in a favorable direction. However, they expect headwinds such as rising consumer debt and elevated interest rates to weigh on economic growth. While a recession is no longer forecasted for 2024, consumer spending growth is expected to cool, and overall GDP growth is projected to slow to under 1 percent in the second and third quarters of the year.

The Conference Board’s leading economic index, which includes unemployment claims data and manufacturing new orders figures, rose in February for the first time in two years. However, the six- and 12-month growth rates for the index remain negative, suggesting some headwinds to economic growth.

On the bright side, the gross domestic income (GDI) measure rose at 4.8 percent in the final quarter of 2023, the highest in two years. The personal consumption component in GDP was also revised up from 3.0 percent to 3.3 percent, indicating stronger consumer spending than previously estimated.

In terms of inflation, the headline Personal Consumption Expenditures (PCE) price index remained unchanged at 1.8 percent, but the core PCE measure, which excludes food and energy prices, was revised down to 2.0 percent. The Federal Reserve has been trying to quash soaring inflation, which reached a peak of 9 percent in June 2022. While inflation has come down since then, it has plateaued around 3.2 percent in recent months, higher than the Fed’s 2.0 percent target. Speculation is growing that the Fed may cut interest rates this year to prevent a recession.

Federal Reserve Governor Christopher Waller stated that the latest inflation figures were “disappointing” and emphasized that the Fed is not in a rush to cut rates. He believes it is appropriate to reduce the number of rate cuts or delay them in response to recent data.

Consumer confidence has improved slightly as concerns about inflation have eased. The University of Michigan’s consumer confidence index rose from 76.9 in February to 79.4 in March. Consumers also expect inflation to soften, with one-year ahead expectations easing to 2.9 percent and five-year ahead outlooks decreasing to 2.8 percent.

Overall, the US economy showed strong growth in the third quarter of 2023, but current GDP estimates for the first quarter of 2024 have declined significantly. There are concerns about rising consumer debt and elevated interest rates weighing on economic growth. Inflation remains a challenge for the Federal Reserve, and while there is speculation about rate cuts, the Fed is cautious about making any hasty decisions. Consumer confidence has improved slightly, but there is still uncertainty about the future. The economy’s performance in the coming months will determine whether it can maintain its positive growth trajectory or face further challenges.