GDP Accelerates in Third Quarter, but Income Gains Suggest Slower Growth Ahead

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 4.9 percent seasonally adjusted annualized rate (SAAR) in Q3 2023, a sharp acceleration from the second quarter to a pace that is well above the long-term average, according to the Bureau of Economic Analysis (BEA). While part of the strength came from a 1.3-percentage point contribution in the recently volatile inventory investment category, real personal consumption expenditures grew at a 4.0 percent annualized rate and private residential fixed investment grew for the first time since the first quarter of 2021. Real final sales to private domestic purchasers, which is the combination of private consumption and fixed investment and is sometimes considered “core GDP,” grew at a 3.3 percent annualized rate, compared to a 1.7 percent annualized rate in Q2.
• Personal income, adjusted for inflation, was flat in September, according to the BEA. Real disposable personal income declined 0.1 percent. Despite the downbeat income numbers, real personal consumption rose 0.4 percent. The imbalance between consumption and income growth caused the saving rate to decline six-tenths to 3.4 percent, its lowest level since December 2022. The Personal Consumption Expenditures (PCE) price index increased 0.4 percent over the month and 3.4 percent compared to a year ago. Excluding food and energy, core PCE rose 0.3 percent, its strongest monthly gain since May, and 3.7 percent compared to a year ago.
• Durable goods orders rose 4.7 percent in August as nondefense aircraft orders jumped, according to the Census Bureau. Excluding transportation, orders were up a more modest 0.5 percent. Core capital goods orders (nondefense excluding aircraft) increased 0.6 percent.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closed sales by one to two months, rose 1.1 percent in September to 72.6 after a 7.1 percent drop the month prior.
• New single-family home sales increased 12.3 percent to a SAAR of 759,000 in September, the fastest sales pace since February 2022, according to the Census Bureau. The months’ supply declined by eight-tenths to 6.9 as the strong sales pace outpaced the 0.7 percent gain in new homes available for sale.

Forecast Impact:

GDP and most of its underlying details came in largely in line with our expectations. The impressive headline number was supported in large part by robust consumption growth, which was expected given the large monthly jump in July consumption to begin the third quarter and more recent strength in retail sales. Still, real disposable personal income contracted 1.0 percent annualized over the third quarter, which suggests the surge in consumption is likely unsustainable moving forward. In fact, the personal saving rate fell to just 3.4 percent in September, down from 5.3 percent in May, leaving limited room for further outperformance of consumption relative to incomes. Further, business fixed investment was weak at negative 0.1 percent, slightly below our most recent forecast expectation of positive 0.9 percent, suggesting ongoing credit cycle dynamics are weighing on business activity. Taken together, we continue to expect a slowing in both consumption and broader economic growth in the fourth quarter. In other categories, an unexpectedly strong build in business inventories was largely offset by weaker net exports, which will likely have a mostly offsetting impact for our Q4 forecast as well.

New home sales were above our expectations and will likely lead to an upward revision to our fourth quarter forecast. Still, we note that this series is notoriously volatile and is at odds with the significant decline in homebuilder confidence over the past several months, and recent purchase mortgage application activity has made new cyclical lows. Therefore, any change to our forecast is likely to be more modest than the 12 percent jump alone would have suggested. The small gain in pending home sales largely supports our forecast for ongoing weakness in existing sales but limited downside given the already recessionary level of existing home sales, and a heightened level of remaining purchases likely being less interest rate sensitive. Still, we expect existing home sales will remain below 4 million units annualized for the next two quarters and will likely remain subdued for some time.

Nathaniel Drake
Economic and Strategic Research Group
October 27, 2023

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