The US Economy Can't Sustain Its Red-Hot Pace, Right?

Halfway through the third quarter, the economy is looking surprisingly strong. A tracker from the Atlanta branch of the Federal Reserve has real gross domestic product growth, based on the limited data we've gotten so far, tracking at 5.8%, which would be the fastest for a non-pandemic quarter in 20 years. If the US keeps up this blistering pace, it would trump economists’ forecasts for every other major economy except India.

It wouldn’t be a shock, of course, if growth ultimately comes in lower than that, but it’s pretty clear at this stage that the third quarter really does look strong. How long can that be sustained? It’s likely that some of the factors boosting economic activity at the moment will abate by the beginning of 2024, but we should be left with an economy still growing at a reasonable pace.

There are four factors driving the Atlanta Fed’s lofty GDP estimate. The first is consumption, which is being boosted by two data releases: June’s strong personal spending report set a higher baseline for third-quarter spending and mechanically makes it likely that average consumption during the period will be greater than in the previous three months; and last week's robust July retail sales report, which suggested that spending momentum carried over into the first month of this quarter.

Beyond consumption, the Atlanta Fed tracker now projects that housing will be a positive contributor to GDP growth for the first time since the start of 2021 thanks to July's strong housing starts report. It also projects that inventories will add around 1% to GDP growth, which makes sense as companies restock their shelves after drawing down inventories for most of the past 18 months.