Big GDP Growth in Q3. So What’s the Fed Going To Do?

The Q3 real GDP advanced estimate came out today at an annualize rate of 4.9%, with the Q2 advance estimate of 2.4% brought down to 2.1% instead. So, there’s no telling where Q3 will ultimately land. It might be lower or, even, higher.

But 4.9% is far hotter than what the Federal Reserve has been looking for, and that probably means continued, if not increased, pressure to keep interest rates high and, therefore, CRE industry spirits low.

First, some observations. “Virtually ignoring over 500 bps of policy rate hikes in the past 19 months, the U.S. economy accelerated at its fastest pace in nearly two years in Q3,” wrote Sal Guatieri, a senior economist at BMO Capital Markets Economic Research, in a note. He observed that consumer spending was up 4.0% clip — again, in real terms, so over inflation. Goods and services spending made “broad gains” and even discretionary items showed strength.

“The core GDP measure we prefer, final sales to domestic purchasers which excludes inventories and net trade, also rose a buoyant 3.5%, after a 2% gain in Q2,” wrote Nationwide Chief Economist Kathy Bostjancic in a note.

“While a 1% decline in real disposable income didn’t help (after two big quarterly gains), personal spending was supported by a dip in the saving rate (to 3.8% from 5.2%; though some studies suggest most low- and middle-income households now have exhausted their stockpile of excess pandemic savings),” Guatieri continued.

That suggests consumer spending isn’t sustainable, as GlobeSt.com considered in September. However, even as many thought Fed Chair Jerome Powell’s recent speech was an implicit indication of a long-term halt in interest rate increases, once again the central bank is more nuanced and hesitant than many market watchers want to acknowledge.

Powell noted that there was a downward trend, with shorter-term inflation measures, whether three-month or six-month, running below 3%. “But these shorter-term measures are often volatile,” he immediately added, saying “inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”

“With the Fed intent on curbing consumer spending, consumers continued to spend in the third quarter and picked up the pace of buying new home in September, despite higher interest rates,” said Quincy Krosby, chief global strategist for LPL Financial, in a note. “While the market does not expect a rate hike at next week’s Fed meeting, there are concerns that the Fed may suggest that they may need to increase rates again before the end of the year if inflation doesn’t ease at a faster pace, and if the economy continues to defy expectations of a slow-down that would quell consumer spending.”