Consumer spending fuels GDP growth

Strong consumer spending helped U.S. gross domestic product grow at a better-than-expected annual rate of 2.8% during the third quarter, though growth was below the 3% rate in the second quarter. Analysts said third quarter trends could factor into next week’s rate-setting decision by the Federal Reserve.

Subject to revision as more data becomes available, the Commerce Department said Wednesday that consumer spending during the third quarter was led by goods that included prescription drugs, motor vehicles and parts, along with services such as healthcare, food services and accommodations.

“Though GDP is backward-looking, it sends a clear message that the economy is doing well, and inflation is moderating, good news for the Federal Reserve,” Oxford Economics Chief U.S. Economist Ryan Sweet said in a statement. “Trend growth in GDP remains solid, reducing the risk of a sudden and significant increase in layoffs.”

Sweet said the outlook for consumer spending growth looks favorable for upcoming quarters, with the labor market expected to remain resilient. “The savings rate is at a healthy level, therefore gains in income will translate into consumer spending,” he said. The government said disposable personal income in the third quarter rose 3.1% on an annual basis, down from the 5% annual increase in second quarter, while personal savings as a percentage of disposable income was 4.8%, down slightly from 5.2% in the prior quarter.

Oxford Economics is standing by its forecast of a 25-basis-point reduction when the Fed’s rate-setting panel meets Nov. 6-7. “If the data continues to come in stronger than anticipated, however, the Fed could start floating trial balloons about the possibility of skipping a rate cut in December,” Sweet said, though Oxford is still expecting some type of cut to end the year.

Commerce officials said federal government spending also contributed to the latest quarterly expansion of the economy, led by defense spending. Factors contributing to slowed growth compared with the prior quarter included a downturn in private inventory investment and a larger decline in residential fixed investment, as that property category continued to struggle under elevated interest rates.