The U.S. economy showed strong growth in the third quarter, reinforcing hopes that a recession may be avoided, and increasing the likelihood of a modest reduction in interest rates by the Federal Reserve in the coming months.

Increased consumer and business spending effectively compensated for a decline in housing construction and a growing trade deficit.

According to the Commerce Department, the country’s gross domestic product (GDP)—which measures the total value of all goods and services produced in the U.S.—grew at an annual pace of 2.8% for the July-September period. This represents a slight decrease from the 3% growth seen in the second quarter and 2.9% for the entire year of 2023.

Economists surveyed by Bloomberg had anticipated a 3% increase.

This report serves as the last major economic overview before a significant election where the economy is a key talking point. While economic performance has been strong under President Joe Biden and Democratic nominee Vice President Kamala Harris, many Americans remain concerned about persistent high inflation. Notably, a recent Reuters/Ipsos poll found that 46% of respondents believed Donald Trump had a better economic strategy, compared to 38% who preferred Harris’ approach.

Economist Paul Ashworth from Capital Economics remarked, “Overall, the U.S. economy seems to be holding up well.” However, he noted that the report does not account for the impact of Hurricanes Helene and Milton, which affected the Southeast in late September and early October, nor does it include the effects of the Boeing workers strike that began last month. Those events are expected to be reflected in the upcoming fourth-quarter growth report.

Is the US economy performing well currently?

Despite experiencing high inflation and interest rates over the past few years, the economy has shown notable resilience, supported by strong wage increases that bolster consumer spending and job creation.

Are consumers still spending?

During the third quarter, consumption rose at an annual rate of 3.7%, up from 2.8% in the previous quarter. Consumer spending accounts for around 70% of overall economic activity.

Goldman Sachs noted that an influx of immigrants has provided a steady supply of workers, supporting spending and alleviating labor shortages as baby boomers retire in large numbers.

To cope with rising prices, particularly low- to middle-income households have accumulated record high credit card debt, pushing delinquency rates to levels not seen in 13 years. Many lower-income consumers have also exhausted their savings accumulated during the pandemic from government stimulus efforts and being unable to work.

Some economists warn that lower household spending and the delayed effects of elevated interest rates may further hinder business revenue and job growth in the upcoming year.

What is the Fed’s expected course on interest rates?

The Federal Reserve, which reduced interest rates in September—the first reduction since 2020—by a significant half percentage point amid concerns over slowing inflation and job growth, is expected to lower rates again in the next month and beyond. These additional reductions could support increased borrowing and spur economic growth, but Fed officials are likely to opt for smaller quarter-point cuts due to worries about reigniting inflation.

Pantheon Macroeconomics anticipates that job growth may weaken more than expected, prompting the Fed to more aggressively lower rates.

The Fed raised its key interest rate to a 23-year high of between 5.25% and 5.5% in 2022 and 2023 due to inflation peaking at 9.1% in mid-2022, the highest level since the early 1980s. With inflation now just above the Fed’s 2% target, they are moving to reduce rates.

Here’s how other sectors of the economy fared:

Business investment sees an increase

Business investments rose by 3.3%, following a 3.9% rise in the previous quarter.

Companies significantly increased their purchases of computers, delivery trucks, factory machinery, and other equipment by 11.1%. Although high interest rates continue to elevate borrowing costs, the recent rate cuts from the Fed and expectations of further reductions should encourage more investment, according to Wells Fargo economist Sam Bullard.

Many businesses are opting for labor-saving technologies, including artificial intelligence, to enhance productivity and address labor shortages.

However, spending on buildings, oil rigs, and other structures saw a decline of 4%.

Government expenditures are on the rise

Government spending increased by 5%, a rise from the previous quarter’s 3.1%. Federal expenditures jumped by 9.7%, while state and local spending went up by 2.3%.

Recent legislation aimed at promoting infrastructure and clean energy projects has provided funding, loans, grants, and tax incentives to support state and local government investment.

Housing sector slows down growth

Construction and renovation in the housing sector fell by 5.1%, marking a decline for the second quarter in a row after four consecutive increases.

Although home building picked up in anticipation of Fed rate cuts bringing down mortgage rates, these rates have increased slightly in recent weeks.

Trade impacts GDP negatively once more

Trade has detracted from growth for the third consecutive quarter, with imports surpassing exports.

Imports saw a significant rise of 11.2% as American consumers continued to purchase international goods, while exports increased by a solid 8.9%. However, the widening trade deficit has slowed overall GDP growth.

This article has been revised to include recent developments.