U.S. Q3 GDP Grows 2.8%, Misses Forecast as Housing and Income Growth Slow

U.S. Economy Grows 2.8% in Q3, Missing Expectations

The U.S. economy grew at a 2.8% annualized rate in the third quarter of 2024, falling short of the 3.1% forecast by economists surveyed by Dow Jones. Although consumer spending remained a strong driver, its effects weren’t sufficient to keep pace with the previous quarter’s 3.0% growth. This preliminary report, released by the Bureau of Economic Analysis (BEA), offers insights into the drivers of U.S. economic performance as well as areas showing signs of a slowdown.

Key Growth Drivers

Consumer spending stood out as a primary force behind the 2.8% GDP growth rate. Household spending rose across both goods and services, with strong contributions from prescription drugs, motor vehicles, and food services. The service sector also experienced gains led by healthcare and accommodations, suggesting that consumer confidence remained robust despite higher borrowing costs.

Exports rose significantly, led by non-automotive capital goods, bolstered by favorable exchange rates and stable global demand. Federal government spending also surged, driven by increased defense expenditures. These factors collectively supported GDP but were counterbalanced by increases in imports, which exerted a net drag on the economic output.

Sectoral Declines and Inflation Trends

A downturn in private inventory investment and a larger decrease in residential fixed investment contributed to a slower pace of economic expansion compared to Q2. In particular, the cooling housing sector highlighted the impact of higher interest rates on residential investment, reducing consumer demand for new home purchases and renovations.

Inflation indicators revealed some relief as the price index for gross domestic purchases rose by 1.8%, down from 2.4% in the second quarter. The personal consumption expenditures (PCE) price index showed an even greater slowdown, increasing by 1.5% versus the 2.5% rise seen in the previous quarter. Excluding volatile food and energy prices, the core PCE index rose 2.2%, a reduction from Q2’s 2.8% increase, indicating modestly easing price pressures.

Personal Income and Savings Trends

Personal income growth showed signs of moderation, with current-dollar personal income rising by $221.3 billion, down from the $315.7 billion gain in Q2. Disposable income gains also slowed, with real disposable income up 1.6%, a decrease from the 2.4% increase seen in the prior quarter. The personal savings rate declined to 4.8% from 5.2%, reflecting tighter household budgets amid slower income growth and persistent inflation.

Market Forecast: Moderately Bearish Outlook

The slightly weaker-than-expected GDP growth and deceleration in key areas such as inventory investment and residential fixed investment suggest potential challenges ahead. While consumer spending and exports provided strength in Q3, moderating income growth, cooling inflation, and a lowered savings rate may reduce economic resilience moving forward. This trend points to a moderately bearish outlook in the short term, especially if consumer spending slows in response to higher borrowing costs and softened income growth. Traders may anticipate increased caution as markets await the BEA’s revised GDP estimate on November 27 for further clarity on the economy’s trajectory.