Analysis
US Growth Hit 3.4% as Core Inflation Rose to 3.1%
The US economy grew at a 3.4% annualised rate in the third quarter, above forecasts, the BEA said on Thursday. Core PCE inflation rose to 3.1% in September from 3.0%, and real consumer spending barely grew.
Two reports released at 8:30 a.m. on Thursday, October 29, told different stories about the same economy. The Bureau of Economic Analysis's advance estimate showed real GDP growing at an annual rate of 3.4% in the third quarter, up from 2.2% in the second and above the 3.2% consensus. Investment, consumer spending and government spending all rose, while exports fell and imports increased. Real final sales to private domestic purchasers, the measure that strips out trade, inventories and government, grew 4.9% after 4.6%.
The quarterly price figures looked reassuring. The PCE price index rose at an annual rate of 2.1% in the third quarter, down from 5.0% in the second, when the jump in energy prices fed through, and the core index excluding food and energy rose 2.5%, down from 3.3%. Nominal GDP grew 5.6%. Those are annualised rates of change from one quarter to the next, and they say little about the level of inflation over the past year.
That came from the second report. September's personal income and outlays data showed the PCE price index up 0.5% on the month and 3.6% from a year earlier, and core prices up 0.3% and 3.1%, from 3.0% in August; all four numbers matched forecasts. Personal income rose 0.2%, or $54.5 billion, and spending 0.5%, or $113.1 billion, but real spending grew by $2.6 billion, less than 0.1%, so almost all of the increase in what households spent went on higher prices. The personal saving rate was 3.8%.
For the Federal Reserve, which held rates the previous afternoon with two officials voting for a hike, the combination is uncomfortable rather than alarming. Growth above 3% and core inflation moving further from the 2% target support those who want another increase; flat real spending at the end of the quarter suggests consumers are already being squeezed by energy costs. Markets went into the reports still pricing a December hike as the more likely outcome, and Thursday's data did little to change that.
The September detail matters more than the quarterly average for what comes next. A quarter that ended with prices rising 0.5% a month and spending flat in real terms is a weaker hand-off to the fourth quarter than the 3.4% headline implies. The employment cost index follows on Friday, the October jobs report on November 6 and consumer prices on November 10; the BEA's second GDP estimate is due on November 25.