U.S. Economy Red-Hot in Q3, But Experts Still Wary

The U.S. economy roared ahead during the third quarter, but economists and market strategists still took a cautious tone as they read the most recent set of tea leaves. The Department of Commerce said Thursday that gross domestic product (GDP) climbed at a 4.9% annualized pace—a number that factors in both seasonality and inflation—during Q3. Among other things, that figure represents:

• A fifth consecutive rise in U.S. GDP
• A faster clip than the second quarter’s 2.1% growth
• Better growth than the 4.7% figure projected by Dow Jones-surveyed economists
• The biggest jump in U.S. GDP since 2021

Among the contributing factors to the better-than-expected acceleration in economic growth? Consumer spending remained healthy, government spending was high (in large part thanks to national defense expenditures), and inventories climbed. Naturally, the main question being bandied about on Thursday centered on the chances of a “soft landing.” That is, will the U.S. actually manage to avoid recession? Related: The Best Compound Interest Investments Despite yet another quarter of solid growth, the answer among many experts was a resounding “maybe.”

Expert Reactions to Q3 GDP

“Just because GDP growth held up well in Q3 does not mean that recession is off the table for the near future,” says Mike Reynolds, Vice President of Investment Strategy at wealth management firm Glenmede. “For one, GDP is a notoriously lagging indicator that merely shows where the economy has been, not necessarily where it’s going. Also, it’s relatively common to see economic growth momentarily accelerate heading into recessions in the U.S. It is not always a straight leg down into recessions, and this cycle may be a good example of that.” Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, notes that GDP growth doubled its place from the first half of 2023 and says the number was “unsurprising. Nonetheless, “our expectations are for slower GDP going forward as positive contributions from volatile net exports and inventories are unlikely to be repeated,” she says. “We will be monitoring developments in private domestic demand—consumption and investment—rather than headline GDP.” Among the concerns is the American consumer, which did improve their inflation-adjusted spending by 4%, even though real disposable incomes were down 1% during the quarter. “A contributing factor may be the declining personal savings rate, from 5.2% to 3.8%,” Reynolds says. “In aggregate, it appears consumers were increasingly willing to tap their savings streams to support spending levels. However, savings are finite and should not be able to prop up the consumer in perpetuity.” “Initial jobless claims were also higher than expected for the first time since August,” adds David Russell, Global Head of Market Strategy at TradeStation. The Department of Labor said Thursday that unemployment filings rose by 210,000, which was slightly higher than the 207,000 estimated. “Those could keep a lid on interest rates for now.” For the record: Not everyone was dour on Thursday’s report, which was just one in a series of recent positive economic news. Russell notes that “expectations were high coming into this GDP report because most parts of the economy have been surging. The sharp drop in the core [personal consumption expenditures] index was good news for the bulls and suggests inflation trends keep improving.” “There continues to be very little chance of a recession when the economy is this strong,” Ryan Detrick, Chief Market Strategist at advisory firm Carson Group, tweeted in response to the report. Related: Appreciating Assets: 10 Best Things that Appreciate in Value