By Justin Lahart
Oct. 26, 2023
A lot of investors are familiar with Stein’s law, named after the late economist Herbert Stein: “If something cannot go on forever, it will stop.”
Third-quarter gross domestic product was far stronger than expected, as Americans stepped up purchases of goods and services. PHOTO: SPENCER PLATT/GETTY IMAGES
Which brings us to Thursday’s gross-domestic-product report. The Commerce Department reported that the U.S. economy grew at an inflation-adjusted 4.9% annual rate, the biggest gain since the fourth quarter of 2021, and far stronger than the less-than-2% rate that Federal Reserve policy makers think it needs to settle in at to avoid overheating.
But while it seems unlikely that fourth-quarter GDP will be as strong as it was in the third, that doesn’t mean it is destined to be weak.
Thursday’s report was far and away stronger than what economists expected when the third quarter got under way: In July, forecasters polled by The Wall Street Journal thought GDP would grow at 0.6%. Moving the decimal point to the right would have made for a more accurate estimate.
One of the big things forecasters got wrong was consumer spending. It grew at a 4% annual rate in the third quarter as Americans stepped up their purchases of both services and, especially, goods. A strong labor market has continued to boost incomes, while it also looks as if U.S. households hadn’t depleted savings built up early in the pandemic by nearly as much as some economists had assumed. The wider availability of some items, such as cars, as supply-chain snarls got ironed out, helped. And the fact that prices for some goods have actually fallen probably supported some spending.
Another big miss was inventories. Many economists thought that businesses would reduce inventory levels, but instead they grew. This added 1.3 percentage points to GDP growth.
So what of the current quarter? Economists polled by The Wall Street Journal earlier this month forecast that fourth-quarter GDP would grow at a 0.9% annual rate. Given their recent performance, one wouldn’t want to put too much stock in that figure, though some type of giveback seems likely.
The inventory contribution doesn’t seem likely to continue. Given how inventories can swing around, they could pull from growth. That said, companies’ effort to cut inventories after over-ordering goods appears to have passed, and with consumers stepping up goods purchases, businesses don’t want their shelves to be bare.
It is easy to see why consumer spending should moderate, too. Interest rates have kept marching higher, plus this month student-loan payments have started.
Yet, the job market has remained remarkably robust, so the economy keeps adding paychecks. Moreover, wages are growing faster than inflation and, if inflation continues to cool, that will continue. Notably, gasoline prices have lately been falling, with regular gasoline averaging $3.53 a gallon on Monday, versus a third-quarter average of $3.75, according to the Energy Information Administration. With futures prices suggesting that pump prices will keep falling in the weeks ahead, more of the money Americans had been pouring into the tank could go toward other purchases.
It is notable that when Herbert Stein first framed Stein’s law in the 1980s, he was talking about America’s twin budget and trade deficits. Things that can’t go on forever can still go on for a long time.
Write to Justin Lahart at Justin.Lahart@wsj.com
Dow Jones & Company, Inc.
