US GDP Growth In Q3 Tops Expectations, Highest Since Q4 2021

The latest report from the Bureau of Economic Analysis reveals that the U.S. economy displayed robust growth in the third quarter of 2023, surpassing initial estimates and posting the strongest expansion since the fourth quarter of 2021.

The second estimate indicates that the annualized GDP growth rate for Q3 2023 stood at 5.2%, outpacing the preliminary figure of 5%.

Key Revisions To Q3 GDP

One of the notable revisions in this report was in nonresidential investment, which was originally estimated to have fallen by 0.1%. However, it was updated to show a surprising 1.3% increase.

This upward revision can be attributed to a smaller decline in equipment (-3.5% compared to the initial estimate of -3.8%) and a remarkable surge of 6.9% in structures (versus the initial estimate of 1.6%), led by commercial and health care (mainly warehouses).

Furthermore, the residential investment sector exhibited stronger signs of growth. It recorded a growth rate of 6.2%, significantly higher than the initially anticipated 3.9%, marking its first positive growth in nearly two years.

Private inventories also made a significant contribution to the overall growth, adding 1.4 percentage points to the GDP, surpassing the previous estimate of 1.32 percentage points. Government spending experienced faster growth as well, expanding by 5.5% compared to the earlier estimate of 4.6%.

Consumer spending, although slightly lower than the preliminary estimate (3.6% versus 4%), still posted its most substantial gain since Q4 2021. The moderation in consumer spending was primarily attributed to a slowdown in services spending. Exports surged by 6%, albeit slightly below the initial estimate of 6.2%, while imports increased at a slower rate, growing by 5.2% compared to the initial estimate of 5.7%.

The acceleration in GDP for Q3 2023, when compared to the previous quarter, can be attributed to increased consumer spending, private inventory investment, and a notable uptick in exports.

Economist Takeaways: Not A Christmas Wish For The Stock Market

“Although the headline numbers were revised higher and look rosy, it is concerning that consumer spending is starting to roll over,” Jamie Cox, managing partner for Harris Financial Group, commented.

Cox believes that U.S. consumers are now feeling the impact of rising interest rates through increased costs. It this is the start of a more significant trend, it could potentially reintroduce the possibility of a recession next year.

Alex McGrath, chief investment officer for NorthEnd Private Wealth, stated that the revised GDP print is not the kind of “Christmas wish” the U.S. stock market was hoping for. The higher-than-predicted GDP outcome could potentially leave the Federal Reserve with room to delay any rate cuts. This outcome may not align with the expectations of the equity market during the holiday season.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, minimized the significance of the figure. He noted that investors appear to be placing greater emphasis on concerns about inflation rather than celebrating economic growth. However, he also pointed out that the economy continues to defy the pessimists, maintaining its positive trajectory. He believes the market will rally until the end of the year and we should have a good start to 2024.

Market Reactions: Dollar Sees Some Respite, Treasury Yields Stay Flat

The U.S. dollar index (DXY), tracked by Invesco DB USD Index Bullish Fund UUP, reacted positively to the upward revision in GDP figures.

However, the dollar index remains below the 103 level, which was last seen in mid-August.

Treasury yields were relatively stable, with the yield on a 10-year U.S. Treasury bond, tracked by the US 10 Year Treasury Note ETF UTEN, trading at 4.30% on Wednesday.

According to CME Group’s Fed Watch Tool, market participants currently assign a 77% chance of a Fed rate cut occurring as early as May 2024, and they are currently factoring in five rate cuts by December 2024 at a 52% probability.

Read now: Bill Ackman Bets On Potential Fed Interest Rate Cut As Soon As Q1 Next Year

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