The US economy recorded a strong performance in the third quarter of the year, although growth rates came in below expectations. According to the Commerce Department report, GDP rose at an annual rate of 2.8% during the July-September period, while economists had expected an increase of 3.1%. The economy accelerated significantly in the second quarter, with growth of 3%.
This report confirms the continued expansion of the US economy despite challenges resulting from high interest rates and ongoing concerns that the fiscal and monetary stimulus implemented in response to the Covid-19 crisis may not be enough to support sustainable growth. However, strong consumer spending, which accounts for about two-thirds of economic activity, has helped maintain growth momentum. Third-quarter consumer spending increased by 3.7%, the highest growth rate since the first quarter of 2023, reflecting consumers’ resilience in the face of changing economic conditions
In addition, government spending played a pivotal role in supporting the economy, rising by 9.7%, driven by a significant increase in defense expenditures, which amounted to 14.9%. This trend reflects the government’s focus on enhancing defense capabilities and achieving economic stability in light of the current international situation.
However, there was a negative impact resulting from the 11.2% rise in imports, which are deducted from GDP, which affected the overall growth figure. Despite this, exports also recorded an increase of 8.9%, demonstrating the strength of U.S. foreign trade.
These dynamics suggest that the U.S. economy is still capable of delivering sustainable growth, even amid global and domestic challenges. The ability of consumers to spend and continued government support raise hopes for sustainable growth in the future, putting the U.S. economy in a good position to face the challenges ahead.
The impact of GDP on interest rates in the United States
The US Final GDP Price Index (QoQ) significantly affects interest rates, primarily through its influence on the Fed’s monetary policy decisions. Here’s how it works:
- Inflation signals
Price rises: If the GDP price index indicates that inflation is rising, it suggests that the economy may be overactive. In response, the Fed may consider raising interest rates to help calm inflationary pressures.
Conversely, if the index shows that prices are falling or inflation is low, the Fed may cut interest rates to stimulate economic activity.
- Monetary Policy Response
Rate hikes: When inflation rises above the Fed’s target (usually around 2%), it often leads to increases in the federal funds rate. This makes borrowing more expensive, which can slow spending and investment, ultimately helping to control inflation
Lower interest rates: If inflation is low or deflation is present, the Fed may cut interest rates to encourage borrowing and spending, with the aim of stimulating economic growth.
- Manage expectations
Market outlook: Changes in the GDP price index can affect market expectations on future interest rate movements. If investors expect inflation to rise based on higher GDP prices, they may expect the Fed to raise interest rates sooner.
- Impact on Financial Markets
Bond markets: High interest rates usually lead to lower bond prices. Investors will demand higher returns to compensate for the expected increase in prices due to inflation.
Stock markets: High interest rates can negatively impact stock markets as borrowing costs increase for businesses and consumers, potentially slowing economic growth.
How the GDP Price Index Affects the Dollar and the Economy
The US Final GDP Price Index, which measures changes in the prices of all final goods and services produced in the economy, plays an important role in influencing the value of the US dollar and the overall economic landscape. Here’s how it affects both:
Impact on the US Dollar
- Inflation Index: The GDP Price Index is a key indicator of inflation. The rise in the index indicates increased inflationary pressures, which could prompt the Fed to consider tightening monetary policy. Higher interest rates generally strengthen the dollar.
- Market sentiment: A higher-than-expected rise in the GDP price index may lead traders to expect aggressive actions from the Fed, which could lead to a stronger dollar. Conversely, a low index could signal lower inflation and the dollar could weaken if traders expect the Fed to maintain or lower interest rates.
- Global comparisons: The GDP price index can affect how investors perceive the U.S. economy compared to other economies. A stable or decreasing indicator may indicate economic strength, making the dollar more attractive compared to other currencies.
Impact on the economy
- Consumer spending: A higher GDP price index can indicate increased costs for consumers, which can lead to lower spending as households face higher prices for goods and services. This decline in consumption can slow economic growth.
- Investment decisions: Companies may adjust their investment strategies based on inflation expectations. If you expect costs to rise, they could postpone capital spending, potentially slowing economic growth further.
- Policy responses: Significant changes in the GDP price index may prompt policymakers to adjust fiscal or monetary policies.
- Wage growth: If the GDP price index indicates persistent inflation, workers may demand higher wages to keep up with rising costs.