Kiplinger’s Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.
GDP grew 2.8% in the third quarter, slowing just a bit from the second quarter. But final domestic demand rose 3.5%, up from 2.8% in the second quarter, indicating still-strong purchasing by U.S. consumers and business. Domestic demand treats imports as a positive factor, and exports as a negative, which is the reverse of their roles in the total GDP figure. Imports rose 11.2% and exports 8.9%, signaling strengthening domestic demand.
The individual spending components of the report back this up. Consumer spending rose 3.7%, the strongest growth in six quarters. Business spending on equipment rose 11.1%, the strongest in five quarters. Government outlays rose 5.0% on the strength of a 14.8% jump in defense spending. The main negatives for spending were in construction: A 4.1% decline in nonresidential building and a 5.2% drop in housing construction.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Good news for the Federal Reserve: The Fed’s favorite inflation gauge, the personal consumption expenditures deflator excluding food and energy, slowed to a 2.2% increase in Q3, down from 2.8% in Q2. The Fed’s goal is 2% inflation as measured by the core PCE over the long run, so if the recent quarter’s slower pace can be sustained, that could allow the Fed to cut short-term interest rates faster next year.
Q4 GDP growth is likely to be slower. While housing should be a positive contributor to growth in Q4, consumer spending and business equipment growth will likely be lower, given their overperformance in Q3 and the cooling labor market. Defense spending is notoriously volatile quarter to quarter, so expect smaller growth there, as well.
2025 economic growth is also likely to be slower, at 2.1%, down from 2.7% in 2024. Growth close to 2.0% is not too bad; in fact, it is in line with the economy’s potential growth rate over the long run. Long-run growth potential is determined by the sum of productivity gains and labor force growth, and those two factors point to a roughly 2% long-term pattern for U.S. GDP.
Some influences that will impact GDP in 2025: Consumers have been reducing their savings in order to spend more. The savings rate was 4.6% in September, down from 5.2% in June, but is likely to rise over the next 12 months, which will cut into households’ spending power. Gains in consumer spending on services have begun to slow as more people become more cautious about their finances. Overall business spending is not expected to pick up much until the political situation becomes clearer after the election, but it will likely strengthen during the year as the manufacturing sector pulls out of its recession.
Import growth is outstripping export growth, meaning that more of U.S. consumer spending is going to support weaker economies overseas. State and local government agencies’ spending will start to slow as their post-pandemic hiring spree diminishes and their staffing approaches normal levels.
Source: Department of Commerce: GDP Data
Read more
-
October CPI Report Hits the Mark: What the Experts Are Saying About InflationCPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are SayingFederal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Jobs Growth Stalls Amid Hurricanes and Strikes: What the Experts Are SayingJobs Report A dismal October payrolls print supports the case for a slow and steady pace of rate cuts.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
CPI Report Points to Gradual Pace for Rate Cuts: What the Experts Are Saying
CPI Inflation surprised to the upside last month but the disinflation trend remains on track.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
Strong September Jobs Report Puts Soft Landing in Sight: What the Experts Are SayingJobs Report A blowout reading on nonfarm payrolls takes another jumbo-sized cut to interest rates off the table.
