This week’s US data was a study in contrasts. Third-quarter GDP data showed solid performance while the latest jobs data showed a clear cooling in the labor market, above and beyond hurricane and strikes impact. The combination should leave the Fed on track to continue policy easing, albeit at a slower pace of 25 basis points each at the remaining two meetings of the year. Evidently, general elections held Tuesday November 5th could open the door to meaningful changes to policy approach in a number of areas. However, disinflation progress is significant enough and already in hand, while those potential policy changes remain uncertain (both in content and timing) so we do not believe they should impact the Fed trajectory near term. Impact on Fed policy—if any—should be a 2025 issue.
Real GDP grew at a 2.8% seasonally adjusted annualized rate (saar) in Q3, little changed from the 3.0% rate in Q2. Household consumption was by far the biggest driver of growth, contributing 2.5 percentage points (ppts). Within consumption, we were a little struck by the surge in goods consumption: 6.0% saar, double the prior quarter’s pace. This seems excessive even in light of upwardly revised income data; it remains to be seen whether future revisions will bring this number lower. In any case, do not count on anything close to a repeat in Q4. Meanwhile, services consumption growth moderated to a year-low of 2.6% saar.
Private investment was mixed, adding just 0.1 ppts as a 0.24 ppt contribution from fixed investment was almost entirely offset by an inventory drag. Equipment investment was strong but was offset by flattish intellectual property investment and declines in residential investment. The latter had been well telegraphed by softer housing starts as builder seek to better manage inventory.
Government was hugely additive to growth, adding nearly 0.9 ppts, a third of it from the federal government. This, too, appears unsustainable. Offsetting that was a 0.6 ppt drag from foreign trade as imports soared well ahead of exports. Whether this was on account of firms trying to get ahead of the dockworkers’ strike is unclear, but neither imports nor exports look likely to sustain the Q3 performance.
All in all, the details suggest rotation in the sources of growth in Q4 and some degree of deceleration, though it will be the monthly data flow that will help us assess the extent of moderation. Even so, 2024 US GDP growth looks set to land at 2.5-2.6%, well ahead of developed market peers. Finally, the GDP deflator dipped to 2.2% y/y, the lowest since Q4 2020.
The latest jobs report was heavily impacted by hurricanes and strikes, so it should be interpreted with a good deal of circumspection. The economy added only 12k jobs in October compared with a downwardly revised 223k in September. The private sector reportedly lost 28k jobs. While this should not be taken as a sign of sudden collapse in labor demand, there was a 112k downward revision to the prior two months and that should be taken as clear evidence that labor demand is slowing. The revision disproportionately impacted the August data, with August payrolls revised down from 159k to 78k. Not only is the relative size of the revision jolting, but it also opens the door wide to a further downward revision to the September data in the next report.
In addition to hurricanes, which impacted people’s ability to work during the month, strike activity lowered the reported number of manufacturing jobs by about 44k. A reversal in both of these effects should deliver a big rebound in November employment numbers. There is little point therefore to dwell on the industry composition in the October data. The unemployment rate was reported unchanged at 4.1% and the participation rate declined a tenth to 62.6%. Average hourly earnings were a touch stronger than expected but we suspect this was mostly due to a compositional skew towards higher paid workers, fewer of whom were made unable to work by bad weather. This has occasionally happened in the past (during winter storms, for instance) and tends to reverse quickly. We continue to see wage inflation, which has already moderated considerably over the past year, trend very gently lower from here.
