U.S. economic growth remained strong in the third quarter, with gross domestic product expanding more than many estimates of the economy’s long-run potential capacity. Adjusted for inflation, GDP grew at an annualized rate of 2.8%, according to updated data from the Bureau of Economic Analysis. That was the same as initially reported, although there were small adjustments in the composition of the growth as an upward revision in business intellectual property spending and inventory investment offset a modest downward revision to personal consumption. Personal consumption continues to provide the horsepower behind the economy, as it has throughout this expansion, even though the revised 3.5% annualized growth was a tad slower than the 3.7% rate in the first estimate.
Along with third-quarter GDP revisions, the BEA has provided the first look at gross domestic income for the third quarter. In theory, GDP and GDI (which measures the income earned while producing the goods and services measured by GDP) should be nearly identical, but inflation-adjusted GDI grew at a 2.2% annual rate in the third quarter after posting a 2% gain in the second quarter. The average of GDP and GDI rose 2.5% in the third quarter, the same as the second quarter. This was the second consecutive quarter in which GDI growth lagged GDP growth and added to the argument that the economy is slowing, but neither indicates that growth has halted. Given the latest data, our estimate of fourth-quarter GDP growth is in the neighborhood of 2%.
Consumers’ view of the economy has improved and they remain supportive of retail sales. The University of Michigan’s consumer sentiment survey climbed for the fourth consecutive month to 71.8 in November, reaching its highest level since April. While core retail sales (based on Census Bureau data but excluding automobile dealers, gasoline stations and restaurants) were unchanged seasonally adjusted in October from September, they increased 5.4% unadjusted compared with October 2023. For the first 10 months of the year, retail sales rose 3.5% year over year and were in line with the NRF’s annual forecast of between 2.5% and 3.5% growth over 2023.
The October labor market was disrupted by hurricanes Helene and Milton as well as multiple labor strikes, with employment rising by just 12,000 jobs. In addition, payroll growth for August and September was revised down by a combined 112,000 jobs, a sign of continued softening in the labor market. The three-month average gain now sits at 104,000, compared with 186,000 initially reported for September. The unemployment rate held steady at 4.1% in October as the number of unemployed people rose by 150,000 jobs but the labor force (people either working or looking for work) declined by 220,000 jobs. Monthly swings in payrolls are expected going forward, but while slower job growth leads to a reduction in consumption, consumer spending currently remains on solid footing.
Minutes of the November meeting of the Federal Reserve’s Federal Open Market Committee revealed that the committee seems comfortable with inflation's progress as it moves closer to their 2% target. Year-over-year inflation as measured by the Fed’s preferred Personal Consumption Expenditures Price Index rose to 2.3% in October from 2.1% in September but has been on a downward trend. Core PCE inflation, which excludes food and energy, was at 2.8%. While Fed officials indicate that they are likely to keep reducing interest rates, Chairman Jerome Powell recently said the economy was "not sending any signals that we need to be in a hurry to lower rates.”
While November retail sales – the first monthly leg of the holiday season – will not be released until mid-December, disposable income and consumer spending showed solid growth in October. Unadjusted for inflation, disposable income (income after taxes) rose 0.7% month over month in October and was up 5.1% from a year earlier. While the largest driver of personal income is employee compensation, which grew 0.5% monthly and 5.7% year over year, interest and dividend income also supported the strong income gains. On the spending side, consumption rose 0.4% monthly in October and was up 5.4% year over year. The personal saving rate increased to 4.4%.
Even though the traditional kick-off to the holiday season started with Black Friday, this holiday shopping season was already in full swing, due in part to a shorter calendar with a late Thanksgiving leaving five fewer shopping days than last year. Based on data seen so far, conditions are shaping up for a successful holiday retail season and we have maintained our forecast for holiday retail sales growth of between 2.5% and 3.5% percent over 2023.