WASHINGTON: The US economy likely grew at a brisk clip in the third quarter, driven by solid consumer spending and business investment, but momentum appears to have since faded amid the rising cost of living and recent government shutdown.
The Commerce Department's initial estimate of third-quarter gross domestic product on Tuesday is also expected to show the economy was supported by lower imports, which helped to curb the trade deficit. Much of the anticipated acceleration in consumer spending was the result of a rush to buy electric vehicles before the September 30 expiration of tax credits.
The data was delayed by the 43-day government shutdown and is now outdated. It will likely confirm what economists call a K-shaped economy in which higher-income households are doing well, while middle- and lower-income are barely staying afloat. Surveys suggest consumer spending, the economy's engine, is being driven by higher-income households, thanks to a stock market boom that has inflated household wealth.
Big businesses have mostly managed to withstand the blow from President Donald Trump's sweeping tariffs, which have increased costs, and are investing in artificial intelligence, reinforcing the economy's foundation, economists said. In contrast, smaller businesses have been hit hard, they added.
"It was a good quarter, but that is not going to be sustained in the fourth quarter," said Brian Bethune, an economics professor at Boston College. "Household budgets are squeezed, the average household, they are just barely keeping their nose above water in terms of real wage gains."
GDP likely increased at a 3.3% annualized rate last quarter, a survey of economists estimated. The economy grew at a 3.8% pace in the second quarter.
The Commerce Department's Bureau of Economic Analysis will also publish its preliminary estimate of corporate profits for the third quarter as well as gross domestic income, which measures economic growth from the income side.
The nonpartisan Congressional Budget Office has estimated the recent shutdown could slice between 1.0 percentage point and 2.0 percentage points off GDP in the fourth quarter. The CBO estimated most of the decline in GDP would be eventually recovered, but projected between $7 billion and $14 billion would not be.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, is expected to have accelerated from the second quarter's 2.5% pace. In addition to households pulling forward EV purchases, spending was likely fueled by services, including air travel and hotel stays.
A Bank of America Institute report showed lower-income households were living paycheck to paycheck and have this year been allocating more of their budgets to groceries rather than eating at restaurants. They also have pulled back spending on clothing as well as airlines and hotels, reflecting their limited ability to substitute purchases amid elevated inflation.
In contrast, higher-income households are spending more at restaurants as well as on travel, entertainment and hotel stays. — Reuters
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