US GDP Grew 3.4 Percent in the Third Quarter, and PCE Inflation Rose to 3.6 Percent in September
The economy grew faster than expected in the third quarter — 3.4 percent — but September's inflation print moved the wrong way: PCE prices rose 0.5 percent on the month and 3.6 percent on the year, and markets now price a December rate hike at roughly 85 percent.
The two numbers Thursday's searches were waiting for landed together at 8:30 a.m. Eastern, and they point in opposite directions. The economy grew at a 3.4 percent annualized rate in the third quarter, the Bureau of Economic Analysis said in its advance estimate — above the 3.2 percent consensus — while the PCE Price Index, the Federal Reserve's preferred inflation gauge, climbed 0.5 percent in September and 3.6 percent over the year, Reuters reported.
The inflation detail is the stubborn part. Core PCE, excluding food and energy, rose 0.3 percent on the month and 3.1 percent year-on-year, up from 3.0 percent in August — still well above the Fed's 2 percent target. The central bank held its benchmark rate at 3.75 to 4 percent on Wednesday while acknowledging inflation "remains elevated," and Chair Kevin Warsh told reporters that energy and related prices have moved higher again in recent weeks and the Fed's job is to keep those relative price changes from broadening across the economy. Markets took the hint: CME's FedWatch tool priced a roughly 84.6 percent chance of a rate hike in December.
Under the headline growth, the quarter's engine deserves a caveat. Consumer spending rose at a 3.8 percent rate in the third quarter, matching the prior quarter, but real final sales — the measure that strips out inventory swings — grew just 1.7 percent, down from 2.8 percent, a sign that inventory accumulation helped lift the headline figure, according to InvestingLive's reading of the release. Trade weighed the other way: exports subtracted 0.68 points and higher imports 2.64 points.
September's household ledger cooled as prices rose. Consumer spending increased 0.5 percent on the month after August's 0.9 percent jump — and after adjusting for inflation it was unchanged, sending spending into the fourth quarter on a weaker trajectory, Reuters reported. For Texas households the translation is direct: a strong economy on paper, grocery-and-gasoline prices still rising faster than the Fed wants, and a central bank now more likely than not to raise rates again before Christmas. Amazon and Intel report after Thursday's close, the next test of whether corporate America is feeling the same squeeze.
