US Q3 GDP Forecast: Consumption May Push 'Over 3%', Will Fed Hit Pause?

On the 30th local time, the U.S. Department of Commerce will release the preliminary GDP data for the third quarter of this year. The latest forecasts from Wall Street show that the U.S. GDP for the last quarter is expected to rebound to around 3%. For the Federal Reserve, the next move after starting an easing cycle largely depends on economic data, and the resilience of the job market may continue to be a key factor affecting the Federal Reserve's monetary policy stance.

GDP may maintain high growth

Data from the U.S. Department of Commerce shows that after slowing down in the first quarter, the U.S. GDP growth rate rebounded to 3.0% in the second quarter, with personal consumption expenditure contributing 1.9 percentage points, and investment becoming another highlight. In comparison, the real estate market and volatile net exports have become the main drag factors.

For the U.S. economic growth rate in the third quarter, the median forecast from institutions is around 3.0%. The divergence in internal forecasts from the Federal Reserve has decreased compared to the previous quarter. The Atlanta Fed's GDPNow model predicts a growth of 3.4%, while the New York Nowcast forecasts a growth rate of 2.9%.

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Wall Street generally believes that consumers are expected to continue to be the main driving force for economic growth. The Oxford Economics Institute forecasts consumer spending to grow by 3.0% year-on-year, and Wells Fargo predicts a growth rate of 3.6%. Steady income growth, ample savings, and a strong household balance sheet support spending and the overall economy. Despite the slowdown in the labor market momentum, the number of layoffs is still at a historical low, supporting wage increases.

Corporate investment maintains strong momentum, with the Atlanta Fed expecting an increase of about 3%.

As sectors sensitive to interest rate levels, manufacturing and real estate, which account for 1/5 of the U.S. economy, are still bottoming out. After the First Financial Journalist's statistics for the data from July to September, the manufacturing PMI in the eastern and central regions of the United States is still in a contraction range but has improved. At the same time, commercial real estate demand has not been released with the rate cut, and high mortgage interest rates and high housing prices have limited the transaction activity of both new and existing homes.

At the same time, trade may continue to drag down economic growth. The U.S. trade deficit remained above $70 billion from July to August, and companies increased imports amid concerns about a new round of tariffs. S&P estimates that a larger trade deficit could slow down GDP by as much as one percentage point.

Last week, the International Monetary Fund (IMF) updated its economic outlook, showing that due to strong consumption, the U.S. economic growth rate for this year has been revised up to 2.8%.How the Federal Reserve Assesses the Policy Outlook

Just three months ago, concerns about an impending economic recession once triggered turmoil in the global capital markets. The unemployment rate rose from 3.4% in April 2023 to 4.3% in July of this year, which was considered the catalyst for the Federal Reserve's aggressive rate cut of 50 basis points in September.

However, with the subsequent emergence of a series of favorable data, including employment reports, the ISM non-manufacturing index, and monthly retail sales rates, the focus of outsiders has shifted to the possibility of a soft landing or even a reacceleration of the economy. Stephen Juneau, an economist at Bank of America, stated that there is a growing optimism that a severe economic slowdown may ultimately not materialize, "The economy is resilient, and we remain satisfied with the base case for a soft landing."

Federal Reserve officials have also taken note of the performance of key indicators and are intentionally slowing the pace of easing. Neel Kashkari, President of the Minneapolis Federal Reserve, recently reiterated that he favors slowing the pace of rate cuts in the coming quarters. "Currently, I predict a more moderate rate cut in the next few quarters to reach near a neutral level, but this will depend on the data," he said, adding that to accelerate action, there needs to be concrete evidence of a rapid weakening in the labor market.

Lorie Logan, President of the Dallas Federal Reserve, echoed this cautious stance, advocating for a "gradual reduction" in interest rates if the economy maintains its current trajectory.

In contrast, Raphael Bostic, President of the Atlanta Federal Reserve, even expressed openness to not cutting rates at the November meeting, "If the data indicate that it is appropriate, then I can fully accept skipping the next meeting."

According to the Chicago Mercantile Exchange's interest rate monitoring tool FedWatch, investors expect a rate cut space of about 39 basis points in the remaining two interest rate meetings this year, which means there may be a situation of standing still.

Ed Yardeni, President of research institution Yardeni Research, warned that further rate cuts by the Federal Reserve in economies that are already performing well could lead to inflationary pressures in prices and asset markets. "The result could be a rebound in both price and asset inflation rates. The latter is definitely happening in the stock market." Torsten Slok, Chief Economist at asset management giant Apollo, also recently emphasized that as the economy grows, the likelihood of the Federal Reserve keeping interest rates unchanged in November is increasing.