U.S. economic growth continued to power higher over the three months ending in September, official data indicated Thursday, as consumer spending and a resilient job market pushed recession risks further into 2024.
The Commerce Department estimated third quarter GDP grew at an annual pace of 4.9%, surging higher from the final 2.1% pace recorded over the three months ending in June, and well ahead of the Street's 4.5% forecast.
The so-called PCE deflator, which the Federal Reserve uses as a benchmark for near-term inflation risks, was pegged at 3.5% for the quarter, also ahead of the 2.5% Street forecast. The core PCE deflator, however, which strips out food and energy prices, eased to 2.4%, the best reading since the fourth quarter of 2019, and a level that may blunt rate-hike concerns over the coming months.
Consumer spending added 2.7 percentage points to the 4.9% advance, the Commerce Department data indicated, while a surprise buildup in corporate inventories – a good indicator of near-term demand – added 1.3 percentage points.
The Labor Department's read of weekly jobless claims was also modestly bullish for bond markets, with the number of Americans filing for new unemployment benefits rising by 10,000 to 210,000 over the week ending on October 21.
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"Despite the Fed’s aggressive moves to increase interest rates to tackle runaway inflation, the economy remains resilient. Another quarter has come and gone," said Steve Rick, chief economist at TruStage, a financial services group based in Madison, Wisconsin. "The GDP remains strong and inflation continues to slow. That said, consumers are still hurting from the elevated costs of core goods as gas, rent and mortgage rates, which remained high in Q3.”
“Importantly, the jobs market remains strong through the volatile, and confusing, economic environment. We expect unemployment to continue to remain below the natural long-run rate of 4.5% over the next years," he added. "This, in combination with slowing inflation, will hopefully minimize the individual effects of a potential recession.”
Benchmark 10-year note yields were marked 9 basis points lower from overnight levels at 4.902% following the GDP data release, while 2-year notes were last seen trading at 5.069%.
U.S. stocks also pared earlier pre-market declines, although the the S&P 500 was down 29 points, or 0.69%, in late-morning trading and the Dow Jones Industrial Average fell 103 points.
The CME Group's FedWatch, a real-time tracker of investor forecasts for near-term rate hikes, suggests a 98.2% chance the Fed will hold rates steady at between 5.25% and 5.5% at next week's policy meeting in Washington, with the odds of a hike over the next four months no better than 27%.
"These data won’t shift opinion at the Fed either way, given that it has been clear for a while that headline Q3 GDP growth would be strong, though the core PCE numbers are pleasant, if modest, surprise," said Ian Shepherdson of Pantheon Macroecnomics. "And the breakdown of GDP - especially the big contributions from inventories and government spending, and the softness of business capex - makes forecasts of slow Q4 growth more plausible."
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