Sizzling Q3 GDP Defies Recession Forecasts, But Interest Rate Hike Warnings Are Dragging US Stock Performance

Despite earlier concerns of a recession in the second part of the year, the U.S. economy has just demonstrated its most robust quarterly performance since the fourth quarter of 2021. When we exclude the post-pandemic period, it stands as the strongest quarter since the second quarter of 2014.

According to the advance estimates released Thursday by the Bureau of Economic Analysis, U.S. gross domestic product expanded at a remarkable 4.9% quarter-on-quarter annualized rate in the third quarter. This marks a substantial improvement compared to the 2.1% growth recorded in the second quarter and surpassed market expectations of 4.3%.

Here’s how economists reacted to the GDP print, highlighting key insights and potential implications for the Federal Reserve’s policy.

Economists Weigh In On Q3 GDP Numbers

Quincy Krosby, chief global strategist for LPL Financial, notes that despite the Federal Reserve’s intention to slow down consumer spending by raising interest rates, consumers continued to boost spending in the third quarter.

While the market doesn’t anticipate a rate hike at the upcoming Fed meeting, there are concerns the Fed might indicate the need for rate increases by the end of the year if inflation persists and the economy defies expectations of a slowdown, which would dampen consumer spending.

It appears that higher interest rates “are not doing the job” for the Fed, Krosby said.

According to Jeffrey Roach, chief economist for LPL Financial, consumer spending accounted for about a half of the quarterly growth. The key concern is whether this trend can sustain itself in the upcoming quarters, and Roach thinks that investors should be prepared for a slowdown in momentum.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the U.S. economy is in a strong position, leading the global post-pandemic recovery as consumer spending booms and businesses replenish inventories.

The Federal Reserve may need to maintain high interest rates for an extended period, but should exercise patience rather than continuously raising rates, he said. Zaccarelli anticipates a market rebound similar to the one seen at the end of the previous year if a recession fails to materialize.

Bill Adams, chief economist for Comerica Bank, said he expects the Federal Reserve to view the strong third-quarter growth as supportive of maintaining restrictive monetary policy.

A slowdown in consumer spending could come in the fourth quarter due to factors like the UAW strike, resumption of student loan payments and cost of living pressures, Adams said.

Auto loan delinquencies have reached levels not seen since 1994, and many households are struggling to cover expenses, he said. Despite the potential for near-term inflation to ease, Adams predicts the Fed will keep rates steady for a while.

Market Reactions To Q3 GDP

The stronger-than-expected GDP print failed to rescue investor risk sentiment Thursday, with the U.S. stock market extending its decline.

The SPDR S&P 500 ETF Trust SPY fell 0.2% Thursday, while the tech-heavy Invesco QQQ Trust QQQ tumbled 0.7%.

The “magnificent seven” basket — consisting of Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, Amazon.com, Inc. AMZN, Meta Platforms Inc. META, NVIDIA Corp. NVDA and Tesla, Inc. TSLA — fell 1.4% Thursday, underperforming the broader market and coming on the heels of a 2.4% pullback Wednesday.

Read now: Meta Platforms Stock Is Moving Lower Thursday: What’s Going On?

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