The American economy expanded more than expected in the third quarter, delivering booming growth even as soaring yields raised borrowing costs for businesses and consumers. 

Data released by the Bureau of Economic Analysis this morning showed the economy expanding 4.9 percent in the July-through-September period, topping market consensus around 4.5 percent, and nearing the estimates provided by the Atlanta Federal Reserve’s nowcasting model. 

Personal consumption surged 4 percent, marking the fastest pace since 2021 after rising just 0.8 percent in the second quarter. Residential investment broke a long series of losses in adding 0.15 percent, while non-residential fixed investment fell -0.1 percent after the prior quarter’s unusual 7.4 percent gain. Inventories, seen as an indicator of demand growth, expanded 1.32 percent, and net exports subtracted -0.8 percent while government spending contributed 0.79 percent. 

Final sales to private domestic purchasers – a proxy for true underlying demand – climbed 3.3 percent after growing 1.7 percent in the second quarter. 

Perhaps most importantly for rates traders assessing the Fed’s reaction, underlying core personal consumption expenditures inflation slipped to a 2.4-percent year-over-year pace, moderating to the slowest pace since 2020. 

Treasury yields inched lower and the dollar held stable as odds on a rate hike next week were left unchanged near zero, and expectations for rate cuts were pushed further into 2024. 

Tomorrow’s personal income and spending data should provide further insight into the handoff from the third quarter, with most early indicators pointing to continued resilience in overall consumer spending – while also suggesting that a softening is ahead. We suspect the US economy’s outperformance could fade over the coming months, driving a narrowing in surprise differentials relative to the euro area and China – a thesis that, if borne out, could sap the dollar’s strength.

The European Central Bank earlier kept its main policy settings unchanged, and delivered a largely-unchanged statement, leaving the euro largely unmoved against its major counterparts.