The U.S. economy grew at an annualized rate of 2.8% in the third quarter, according to the Commerce Department, reflecting a slightly slower pace than economists had expected. Despite this, the growth rate remains a testament to the resilience of the American economy, which continues to expand despite high inflation, rising interest rates, and global economic uncertainty. This growth was driven primarily by strong consumer spending, which accounts for approximately 70% of all U.S. economic activity.
Although economists had predicted a growth rate of 3.1% for the third quarter, the slightly lower figure still points to the steady economic performance the country has enjoyed. Consumer spending rose by 3.7% during the quarter, marking the best performance since the first quarter of 2023, and government spending also contributed significantly, surging by 9.7%. A considerable portion of this spending was driven by a 14.9% increase in defense expenditures, reflecting the government's investment in military readiness and operations.
The report also highlighted a significant rise in both imports and exports. Exports surged 8.9% during the quarter, while imports jumped 11.2%, which dampened overall GDP growth, as imports subtract from the overall calculation. Nevertheless, these figures underscore strong demand, both domestically and abroad, despite persistent fears of an economic slowdown.
However, the latest data from the Commerce Department comes at a time when inflationary pressures, though moderating, remain a key focus for policymakers. The personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose just 1.5% during the third quarter, marking a sharp decline from the 2.5% rise in the second quarter and coming in below the Fed's 2% target. This drop in inflation is a positive signal for the central bank, which has been striving to keep inflation under control without triggering a recession. Excluding food and energy costs, however, core inflation remains higher, rising by 2.2%.
The report also comes as the Federal Reserve considers another round of interest rate cuts. Markets widely expect that the Fed will lower rates by another quarter of a percentage point during its upcoming meeting. Although the U.S. economy has performed well, the central bank is expected to continue easing monetary policy as it navigates the delicate balance between fostering growth and managing inflation.
One potential challenge for the economy is the declining personal savings rate. The savings rate fell to 4.8% in the third quarter, down from 5.2% in the previous quarter, as consumers increasingly rely on savings and credit to fuel their purchases. This trend, coupled with higher borrowing costs from elevated interest rates, could pose risks to future spending levels and economic growth.
While the data paints a largely positive picture, the economic outlook is not without concerns. Housing market activity, for example, remains sluggish, with a 5.1% decline in the third quarter, following a 2.8% drop in the second quarter. Rising mortgage rates have weighed heavily on housing demand, and with no signs of easing in the near term, the sector continues to be a drag on overall growth.
In addition to housing, the ongoing geopolitical tensions, particularly in the Middle East, and the evolving trade relationship with China remain risks for the broader economic outlook. Nonetheless, with resilient consumer demand and strong government spending, the economy has thus far defied expectations of a significant slowdown.
