The U.S. economy sizzled in the third quarter, but the Federal Reserve's primary inflation rate showed easing price pressures. The data helped keep the 10-year Treasury yield from breaking through 5%, though the hot economy reinforces the need for the Fed to hold interest rates higher for longer.
The S&P 500 fell modestly in early stock market action, but pared losses on the data after Wednesday's sharp selloff to the lowest level since the end of May.
Third-Quarter GDP Growth
Real gross domestic product grew at a 4.9% annualized rate in Q3, up from Q2's 2.1% pace. Growth was fueled by a 4% rise in personal consumption expenditures, or PCE. But fixed investment grew just 0.8%, as equipment purchases fell 3.8%.
The change in inventories contributed 1.3 points to GDP growth. Absent that, GDP would have grown 3.6%.
Government purchases and investment grew 4.6%, adding eight-tenths of a point to GDP growth.
The Fed's Key Inflation Rate
The core PCE price index, which excludes food and energy, rose at a 2.4% annual rate in Q3, down from 3.7% in Q2. However, a closer look shows that core prices were tame only because prices for core goods, like autos, cell phones and apparel, fell at a 2.1% annual rate.
Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That's in keeping with the Fed's view that the tight labor market and elevated wage growth have been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
The Q3 data for supercore PCE inflation showed prices rising at a 3.5% annual rate, a touch higher than in Q2. The data confirm that the Fed still has a long way to go to bring down inflation for this category of spending, which includes health care, haircuts and hospitality.
The Commerce Department will release monthly inflation data for September on Friday, part of its personal income and outlays report. The Q3 data implies that supercore services inflation ran hot in September, after tame readings the prior two months.
Jobless Claims
Initial claims for unemployment benefits rose 10,000 to 210,000 in the week through Oct. 21. The four-week average of claims rose 1,250 to 207,500, holding near an eight-month low. However, ongoing claims for unemployment assistance rose 63,000 to 1.79 million, the highest since May.
10-Year Yield, S&P 500 Reaction
The S&P 500 traded down about 0.4% after the GDP data, but were down 0.8% ahead of the release. The 10-year Treasury yield, which was closing in on 5% ahead of the data, eased back to 4.91%.
Meta Platforms fell 4.7% after releasing better-than-expected earnings late Wednesday, but warning that advertising had softened at the start of Q3.
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Federal Reserve Policy Impact
Even hawkish policymakers have said lately the rise in the 10-year Treasury yield has tightened financial conditions, doing the Fed's work for it. That's why markets see just 2% odds of a rate hike at next week's Fed policy meeting. Rate-hike odds rise to 29% for the Dec. 13 policy update and 38% for the Jan. 31 meeting.
