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GDP grew 2.8% in the third quarter, slowing just a bit from the second quarter. But final domestic demand rose 3.4%, up from 2.8% in the second quarter, indicating still-strong purchasing by U.S. consumers and businesses. Domestic demand treats imports as a positive factor, and exports as a negative, which is the reverse of their roles in the total GDP figure. Imports rose 10.2% and exports 7.5%, signaling strengthening domestic demand.
The individual spending components of the report back this up. Consumer spending rose 3.5%, the strongest growth in six quarters. A strong rise in consumer real disposable income in October indicates that consumers have not run out of gas, yet. Business spending on equipment rose 10.6%, the strongest in five quarters. Government outlays rose 5.0% on the strength of a 13.9% jump in defense spending. The main negatives for spending were in construction: a 4.7% decline in nonresidential building and a 5.0% drop in housing construction.
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Good news for the Federal Reserve: the Fed’s favorite inflation gauge, the personal consumption expenditures deflator excluding food and energy, slowed to a 2.1% increase in Q3, down from 2.8% in Q2. The Fed’s goal is 2% inflation as measured by the core PCE over the long run, so if the recent quarter’s slower pace can be sustained, that could allow the Fed to cut short-term interest rates faster next year.
Q4 GDP growth is likely to be slower. While housing should be a positive contributor to growth in Q4, consumer spending and business equipment growth will likely be lower, given their overperformance in Q3 and the cooling labor market. Defense spending is notoriously volatile quarter to quarter, so expect smaller growth there, as well.
2025 economic growth is also likely to be slower, at 2.3%, down from 2.7% in 2024. Growth close to 2.0% is not too bad; in fact, it is in line with the economy’s potential growth rate over the long run. Long-run growth potential is determined by the sum of productivity gains and labor force growth, and those two factors point to a roughly 2% long-term pattern for U.S. GDP.
Some influences that will impact GDP in 2025: Import growth is outstripping export growth, meaning that more U.S. consumer spending is going to support weaker economies overseas. Consumers have also been reducing their savings in order to spend more. The savings rate was 4.4% in October, down from 5.2% in March, but is likely to rise a bit over the next 12 months, which will cut into households’ spending power. Overall business spending will likely strengthen during the year as the manufacturing sector pulls out of its recession unless exports drop because other countries retaliate against new U.S. tariffs on imports. Corporate profits are still high at 13.0% of GDP, so businesses still have the means to spend once, they feel more comfortable about the direction of the economy. State and local government agencies’ spending will start to slow as their post-pandemic hiring spree diminishes and their staffing approaches normal levels.
Source: Department of Commerce: GDP Data
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