U.S. GDP grew a staggering 4.9% year-over-year in the third quarter, well above consensus expectations of 4.5%. This was the fifth strongest quarter of economic growth in the 21st century, excluding the pandemic-driven recovery in 2020 and 2021. Because of this improvement, the soft landing consensus has become more firmly entrenched, with economic growth expected to rise in the fourth quarter of 2023 and 2024 in October each by a few tenths.
Private consumer spending was robust in the third quarter. Consumption was 4%, accounting for more than half of economic growth in the third quarter. Given the high share of consumption in GDP, it is perhaps not surprising that periods of strong economic growth typically coincide with periods of strong consumption growth. What is surprising, however, is that consumption has historically remained strong until a recession or even after a recession begins. In fact, consumption was positive in the quarter before the start of each of the last eight recessions and remained positive at the start of the recession in five of those eight cases.
The current strength of consumers is surprising compared to expectations for the coming year. Purchasing power has been bolstered by a labor market that continues to add workers, albeit at a slower pace, as evidenced by weaker-than-expected jobs reports for October and downwardly revised job totals for August and September, and the slower but still significant Wage increases recorded. Additionally, consumers received a tailwind from accumulated savings, the balance of which appears to be higher than recent revisions to personal income and savings data suggested.
Stock of the New York Stock Exchange (NYSE) in New York, USA, on Friday, October 20, 2023. Stocks fell around the globe, bonds rose and oil reached $90 a barrel on fears that Israel’s war with the Hamas could escalate a major conflict in the Middle East. Photographer: Michael Nagle/Bloomberg© 2023 Bloomberg Finance LP
We believe several of the pillars supporting a stronger consumer are likely to weaken in the coming quarters. Although consumers have accumulated more excess savings and spent them more slowly than previously thought, we believe that most of this cash stockpile remains in the hands of higher-income households, who view these savings as additional wealth rather than additional purchasing power. While borrowing has also boosted consumption, consumers are finding it harder to get credit. Sixty percent of respondents said credit was harder to get than a year ago, according to the New York Fed’s latest survey of consumer expectations.
Additionally, consumers have been undersaving compared to the pre-pandemic norm, with the savings rate currently down to 3.4%, compared to an average of over 6% in the decade before the pandemic. Perhaps strong confidence in the strength of the labor market has contributed to this low savings rate, which inevitably means a larger share of income is spent. However, if the labor market continues to cool, consumers may well decide to save a larger portion of their income, which would also dampen consumption. This dynamic is why we believe initial jobless claims are an important metric to keep in mind when assessing the state of consumers and their impact on the economy.
We continue to believe that investors are at the core of this economic cycle. Despite the strong GDP numbers in the third quarter, economic and corporate earnings data continue to paint a mixed to negative picture of the health of the economy. Notably, the unemployment rate reached 3.9% in October, the highest level since January 2022. The first numbers from the Atlanta Fed’s GDPNow tracker suggest a significant slowdown in the fourth quarter, although it is still too early in the quarter to report any major changes To make predictions in this reading. We continue to assume that clarity about further economic development will emerge in the coming quarters. As we move forward, we will continue to monitor the data – be it improvement or deterioration – and update our views accordingly.
Jeffrey Schulze, CFA, is a director and head of economic and market strategy at ClearBridge Investments, an affiliate of Franklin Templeton. Its predictions should not be construed as a reliable prediction of actual future events or as performance or investment advice. Past performance is no guarantee of future returns. Neither ClearBridge Investments nor its information providers are liable for any damages or losses arising from the use of this information.
I am the head of economic and market strategy at ClearBridge Investments, a subsidiary of Franklin Templeton. I oversee capital markets and economic research, provide thought leadership on these topics, and am frequently quoted as a source in the financial media, including the Wall Street Journal, CNBC, and CNN. I joined ClearBridge Investments in 2014 and currently have 14 years of experience in the investment industry. Prior to joining ClearBridge, I was a portfolio specialist at Lord Abbett & Co., LLC. I have a bachelor’s degree in finance from Rutgers University and am a member of the CFA Institute.
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