America’s Halloween-Eve GDP Delivers Few Scares

Undercutting lingering recession fears that seem to continue haunting some investors—and the spirit of the season—US Q3 GDP was decidedly un-spooky. The data, released Wednesday, show the world’s largest economy grew 2.8% annualized in the quarter.^[i] It is a slight slowdown from Q2’s 3.0% and missed analysts’ 3.2% estimate.^[ii] But the big picture here is what matters most, in our view: The trends powering growth in recent quarters largely continue. Backward-looking as these data are, they are another step toward driving a stake into undead recession worries’ heart.

Forgive the Halloween wordplay, but the data did drop a day before kids stalk the sidewalks in search of sweets. And, looking deeper than the headline slowdown, the report featured plenty of treats. Real personal consumption expenditures—long feared at risk from high prices—jumped 3.7% annualized, the fastest growth since Q1 2023.^[iii] Business investment, a typical swing factor for growth, also rose 3.3% annualized, powered by 11.1% growth in equipment spending—the second-straight strong quarter after Q2’s 9.8%.^[iv] Taken together, we see stronger-than-feared household consumption and businesses’ continuing to shift to offense. This is the backdrop we think stocks have been pre-pricing for some time.

Real estate investment—both residential (-5.1% annualized) and private business investment in structures (-4.0%)—was among the detractors.^[v] While rate-sensitive residential real estate has frequently detracted since mortgage rates started climbing a couple years ago, the business side’s decline is new this quarter.

A deeper dive into the data show this was largely a result of cooler factory investment (from 21.7% annualized in Q2 to 2.2% in Q3).^[vi] Fast growth in private factory investment has long buoyed the category overall. To our read, this largely looks like businesses adjusting after a widely known period of weak demand for manufactured goods. It also coincides with the election, and uncertainty over that may cool corporate plans temporarily. But we don’t think that is the chief factor, given services have powered US economic growth in this expansion. In this way, it looks like another continuation of existing macroeconomic trends.

Other detractors included net exports, as imports outgrew exports. Both were positive (up 11.2% annualized and 8.9%, respectively), which is really what we think you want to see, as rising imports and exports point to healthy demand at home and abroad.^[vii] But the calculation subtracts imports from exports, so this healthy circumstance actually subtracts from headline growth.

Lastly, we would be remiss if we didn’t point out one factor: Government spending. Federal government spending rose 5.0% annualized in the quarter, powered by a 14.9% jump in defense spending.^[viii]

Look, we get that this is a bugbear to many, given deficit fears, election talk and the fact defense spending ties to wars ongoing abroad. And, despite GDP calculations treating it as such, we don’t think rising government spending is auto-positive. But from the pure effect on growth, it is a mistake to overrate or fixate on government spending in Q3.

The 5.0% annualized rise in federal spending added 0.6 percentage point (ppt) to the 2.8% headline growth rate.^[ix] If you exclude it and look solely at private-sector activity, household consumption, business investment and residential real estate combined added 2.5 ppt.^[x] That is up from Q2’s 2.2 ppt.^[xi] The private sector entered Q4 on sound footing.

All in all, those looking for a scary movie in US economic data are likely to come up pretty empty in Q3 GDP. Continued services-led growth and a private-sector acceleration just don’t seem very ghoulish to us. Those are the very trends running for two years now—the factors that have disproven recession fright repeatedly, helping power this beautiful bull market.