The Dow fell as the US economy grew much faster than previously thought in the third quarter, a sign that the Federal Reserve’s fight to cool the economy to fight inflation is having limited effect.
The Commerce Department’s latest reading on Thursday morning showed that gross domestic product, the broadest measure of the US economy, grew at an annual rate of 3.2% between July and September. That was above the 2.9% estimate from a month ago. Economists polled by Refinitiv had expected GDP to remain flat from the previous reading.
The report said the stronger-than-expected reading was due to increases in exports and consumer spending, partially offset by a fall in spending on new homes. Consumer spending accounts for more than two-thirds of the country’s economic activity.
US stocks tumbled on Thursday on fears that stronger-than-expected GDP could prompt the Fed to hike rates more than expected in 2023. while the S&P 500 fell 1.5% and the Nasdaq fell 2.2%.
“The data has been consistently stronger and if there’s anything the Fed doesn’t want to see today, it’s better than expected data,” said Paul Hickey of Bespoke Investment Group.
The Fed has been raising interest rates throughout the year to dampen demand for goods and services and lower inflation. Economists have feared for some time that the Fed’s actions could plunge the US economy into a recession next year.
“The reality of the Federal Reserve’s resolve is sinking,” said David Kotok, chairman and chief investment officer at Cumberland Advisors, citing efforts to get the economy back on track for 2% inflation. “I don’t see how a recession can be avoided if the Federal Reserve doesn’t change policy.”
Thursday’s major market downturn could be aided by thin year-end trading.
“Some of the big swings we’re seeing is part of the illiquidity going into year-end as many traders and investors are on vacation and any new data is over-extrapolated both ways,” noted Keith Lerner, chief market strategist at Truist Advisory Services.
Inflation has cooled in recent numbers but the US economy has remained strong. Some surveys released this week suggest that the Fed’s higher interest rates are not slowing corporate or consumer spending.
A recent survey of Chief Financial Officers found that current interest rate levels have not impacted their spending plans. And consumer confidence improved in December, reaching its highest level since April, according to a Conference Board survey.
Additionally, employers have continued to hire at a historically strong pace, although layoffs have increased in some industries, notably the technology sector.
A separate Labor Department report on Thursday showed that jobless claims were relatively unchanged.
Weekly initial jobless claims for the week ended December 17 rose to 216,000. The previous week’s total was revised upwards by 3,000 to 214,000.
According to Refinitiv, economists expected first claims to land at 222,000.
Weekly totals for initial claims are hovering around pre-pandemic levels. In 2019, weekly applications averaged 218,000.
Ongoing claims, which include people receiving ongoing benefits, declined slightly to 1.672 million in the week ended December 10. Last week’s ongoing claims figure has been revised to 1,678 million.
Meanwhile, mortgage rates fell again last week – for the sixth straight week – with the average 30-year fixed-rate mortgage falling to 6.27% from 6.31% the week before, according to Freddie Mac. A year ago at this point the 30-year fixed-rate mortgage was at 3.05%.
“Interest rates have come down significantly over the last six weeks, which is helpful for potential homebuyers,” said Sam Khater, Freddie Mac’s chief economist.
The final GDP report is one of the most retrospective readings the government is releasing, looking at the state of the economy nearly three months ago. The current forecast by economists is that growth will be just 2.4% in the current period, significantly slower than on Thursday.
– CNN’s Anna Bahney and Matt Egan contributed to this report