US real GDP grew at a robust clip in Q3 2024, and while underlying inflation has been a tad sticky, overall inflation is hovering just above the Fed’s 2-percent target. The data intensify the Fed’s dilemma over whether to cut interest rates in November and by how much.  

Trusted Insights for What’s Ahead™

• The US economy appears to be on even keel.
• Consumers have disposable income and savings and are upbeat heading into the holiday season.
• Industrial policies supporting infrastructure and tech continue to boost government spending.
• Businesses investment is perking up and should improve once election uncertainty clears and the cost of capital falls with interest rates.
• Housing activity remains weak but should pick up next year as interest rates fall.
• Net exports continue to be a drag on the economy, but mainly because imports growth is outpacing exports growth.
• Q4 real GDP growth may be slower as hurricane effects and inventory destocking cap the expansion.
• Consumer spending might be a bit less robust in Q4 given the accumulation of debt, but there is notable upside risk given an improving inflation and interest rate environment.
• Absent major negative surprises in the November employment report that are not explainable by hurricane effects, a 50bp interest rate cut or more would be inappropriate, in our view.
• However, the dilemma is really whether a cut is warranted at all.
• We posit the Fed will deliver a 25bp cut at next week’s FOMC meeting unless employment data surprise significantly to the upside.

Figure 1. US Real GDP Growth Strong in Q3 2024

Sources: Bureau of Economic Analysis and The Conference Board.

Figure 2. Inflation Slowing Towards Fed’s 2-percent Target

Sources: Bureau of Economic Analysis and The Conference Board.

Report Highlights: GDP and PCE

Real GDP growth remained healthy in Q3 2024. The US economy expanded by 2.8 percent annualized in the third quarter, slightly above our 2.5 percent annualized forecast, but slightly below consensus estimates, which anticipated roughly 3 percent growth.

Consumers drove growth, again. Given continued strength in real disposable income growth and a healthy labor market, consumers continued to drive much of the expansion in the quarter. Real consumer spending rose by an outsized 3.7 percent annualized, very close to our projections, driven by material spending on both goods and services. Among goods, households spent heavily on big ticket items like cars, furniture, and recreational equipment, as well as on clothing and shoes. Consumers did spend more on food, but less on gasoline. Among services, consumers spent money on both necessities like health care, housing, and transportation costs and discretionary services like food, hotels, and recreation.

Figure 3. Real After-Tax Income Growing at a Solid Pace

Sources: Bureau of Economic Analysis and The Conference Board.

Business investment held up another quarter. Nonresidential investment continued to rise in Q3 despite reduced CEO optimism more recently. Importantly, the quarterly gain was more broadly based compared to prior quarters as firms purchased tech, industrial and transportation equipment, and IP. Investment in structures fell, weighed down by declines in commercial and health care, power and communication, mining, and other structure (e.g., education, lodging) building. While factory building investment slowed, growth remained positive, and construction of land transportation infrastructure continued to grow. Investments in these types of construction are consistent with US industrial policies supporting reshoring of factories and domestic infrastructure building.

Residential investment surprised to the downside. Residential investment fell for a second consecutive quarter, declining by 5.3 percent annualized in Q3, after experiencing a sizable downward revision to Q2 investment. Investment fell for new single- and multi-family structures, and commissions and ownership transfer costs for existing homes were also down.  Investment in manufactured homes, which was outsized in the first half of 2024, was flat in Q3. One bright spot is that spending on home improvements continued to rise at a healthy pace.

Inventory accumulation was slightly less than expected. The overall change in real inventories was somewhat less than expected and resulted in a net drag in Q3. While retail trade inventory building remained elevated as companies accelerated imports ahead of the East- and Gulf-Coast port strikes, stockpiling of manufacturing and wholesale goods was a slower.

Dueling trade activity caped Q3 expansion. Net exports were a drag on the economy, but mainly because imports growth (8.3 percent annualized) continued to outpace exports growth (4.9 percent annualized. Since mid-2023 trade has been on the upswing, but outsized domestic demand is causing imports to expand at a far more rapid pace than exports.

Government spending continued to boost growth. Government consumption and investment continued to bolster real GDP growth in the third quarter. The contribution from government to real GDP growth has been positive and sizable every quarter since mid-2022. Indeed, mid-2022 marked the final piece of legislation supporting US industrial policies. Starting in late 2021, congress passed three bills that supported greater investment in infrastructure, R&D, chips, and activities related to the green transition at the federal and state and local levels. These types of investments tend to have large multipliers in the short-run and boost productivity growth over the longer-run. The legislation also resulted in “crowding-in” of private investment in the US and from abroad, which also supported US economic growth over the last few years.

Headline PCE inflation is now just above the 2-percent target. Total PCE deflator inflation cooled to 2.1 percent year-over-year in September, the slowest rate of annual increase since February 2021. Easing in the overall measures reflects continued declines in goods prices, especially for gasoline, cars, furniture, recreational goods, and assorted other durable goods. Food prices are still contributing to upward pressures on inflation, but to a lesser extent compared to a year ago.

Figure 4. Falling Goods Prices Continue to Cool Inflation

Sources: Bureau of Economic Analysis and The Conference Board.

Figure 5. Services Costs Easing More Slowly

Sources: Bureau of Economic Analysis and The Conference Board.

Core PCE inflation remains a tad sticky. The slower pace of easing in inflation less food and energy reflects a slower pace of cooling in services costs. Shelter costs remain a sizable contributor to year-over-year inflation, but this is shrinking consistent with past calming in home prices, which is projected to continue. Labor shortages that are driving up wages are keeping inflation for some services like restaurants elevated. Structural changes, including an aging population, more high-tech cars, and repeated natural disasters are inflating insurance costs. Despite these pressures we continue to anticipate inflation to stabilize at 2-percent sooner then the Fed’s Summary of Economic Projections suggest.

Figure 6. Rising Insurance Costs Keeping Core Inflation Sticky

Sources: Bureau of Economic Analysis and The Conference Board.

Figure 7. Shelter Cost Inflation Should Continue to Slow

Sources: S&P, Bureau of Economic Analysis, Bureau of Labor Statistics, and The Conference Board.