The U.S. economy is expected to have sustained robust growth in the third quarter of 2023, driven by easing inflation and rising wages, which have fueled consumer spending. With a tightly contested presidential election looming on November 5, Americans are increasingly concerned about economic issues, particularly the rising costs of food and housing. The upcoming election pits Vice President Kamala Harris against former President Donald Trump, with polls indicating a deadlock in voter preference. Voters have consistently rated Trump as the candidate likely to better handle economic matters, showcasing the significance of economic performance in influencing electoral outcomes.
According to economists, the Gross Domestic Product (GDP) is projected to have increased at an annualized rate of around 3.0% in the July-September quarter, replicating the growth rate from the previous quarter. Despite some fluctuations, such as a surge in the goods trade deficit that led the Atlanta Fed to revise its estimate slightly downward, the anticipated growth rate remains significantly above the 1.8% threshold considered non-inflationary by Federal Reserve officials. Earlier revisions to economic data have suggested a stronger economic standing than previously believed, effectively bridging the gap between traditional GDP figures and an alternative measure known as gross domestic income (GDI).
The Federal Reserve responded to the current economic conditions by adopting a more relaxed monetary policy. It recently made an unusual half-percentage-point rate cut—the first since 2020—bringing the policy rate to the range of 4.75% to 5.00%. This shift appears to reflect resilience in the economy, indicating that monetary policy may not have been as restrictive as initially thought. Economists have attributed this ongoing strength to increasing worker productivity, which has sufficiently absorbed rising labor costs without causing excessive inflation.
Despite an apparent slowdown in the labor market, the number of layoffs remains remarkably low, while wages have continued to rise considerably. This favorable trend has contributed to enhanced household net worth, spurred by gains in the stock market and rising home prices. Significantly, inflation has shown signs of easing, providing much-needed relief for families, especially those from lower-income backgrounds. The personal consumption expenditures price index, which monitors inflation closely for the Fed, is anticipated to rise at a more moderate 2.1% rate, down from 2.8% in the previous quarter. The uptick in real wages has emerged as a critical factor supporting economic momentum alongside stabilized house prices and a robust stock market.
Consumer spending, which represents more than two-thirds of overall economic activity, is projected to have experienced growth at a rate of at least 3.5%, reflecting an upswing from a previous growth pace of 2.8% in the second quarter. However, several concerns emerge regarding whether this growth is primarily benefitting middle- and upper-income households, who typically possess greater consumption flexibility. Investment in technology, particularly artificial intelligence, has likely bolstered GDP through business spending, alongside contributions from government spending. In contrast, inventory levels are expected to remain stable while residential investment, covering home construction and sales, may see contraction for the second consecutive quarter.
Trade figures are anticipated to negatively impact GDP growth for the third straight quarter. Although natural disasters like Hurricanes Helene and Milton, along with strikes at Boeing, minimally affected GDP in the previous quarter, future repercussions could be more pronounced in the current quarter. Continuous strength in the economy might lead the Federal Reserve to take a more conservative approach to reducing interest rates than previously anticipated, with projections leaning towards a gradual easing of policy rather than aggressive cuts. Analysts believe that as labor market softening appears more manageable, the Fed’s forecasted path for rate cuts aligns with a potentially higher-end target for the federal funds rate than initially anticipated. Overall, these economic dynamics are shaping the political landscape as the upcoming election draws near, with voter sentiment intricately linked to the realities of financial well-being in American households.
