Key Takeaways
- Economic growth is expected to slow down in the fourth quarter, possibly making the year’s final months its weakest.
- Consumer spending is expected to fuel continued growth, while economists keep an eye on a labor market that is sending mixed signals.
- Sectors hardest hit by high interest rates are also expected to show improvement as the Federal Reserve’s interest rate reductions start to have an effect.
Economic momentum is projected to slow in the fourth quarter, but economists expect consumers will provide enough power to fuel growth through the year’s end.
High interest rates, a slowing job market, and continued price pressures have weighed on the economy so far this year, but not enough to tip it into a long-predicted recession. The Federal Reserve is shifting from fighting inflation to maintaining a historically low unemployment rate. Meanwhile, market watchers, consumers, and businesses await the outcome of the November presidential election to get some idea of the direction of fiscal policy.
Those factors could make the last quarter crucial for the trajectory of the U.S. economy. Several analysts expect the final quarter’s Gross Domestic Product (GDP) to grow between 1% and 1.5%. That would likely make it the weakest quarter of the year but would avoid an economic downturn.
Labor Market Weakness Could Weigh on Economy
U.S. GDP increased 1.6% in the first quarter, followed by a stronger-than-expected 3% in the second quarter. Official numbers for the third quarter won’t be released until the end of October, but projections by the Atlanta Federal Reserve put it at 3.2%.
Economists believe the primary drag on the economy could come from the labor market, where there have been signs of deterioration. Data from the private sector showed unusually high layoffs and government tracking indicated slower hiring.
However, the closely watched jobs report from the Bureau of Labor Statistics earlier this month showed that the unemployment rate fell to 4.1% in September and, surprisingly, employers created more than 250,000 jobs. That data could indicate that the labor market may be stronger than anticipated.
“This should put to rest—at least for the next month—the idea that the economy is about to fall off a cliff or that imminent doom is on the horizon,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
Consumer Spending Likely to Support GDP Growth
Economists expect consumer spending to remain resilient despite questions about the job market. This is partly due to a continuing deceleration in inflation, which is easing price pressures across the economy.
“The latest economic data continues to point to a gradual economic downshift, with consumers and businesses still spending but doing so with more prudence,” wrote Gregory Daco, chief economist at EY-Parthenon.
Economists said the Federal Reserve’s pivot to interest rate cuts could also boost GDP. Sectors like housing, construction, and manufacturing have struggled with high borrowing costs and could see a rebound.
“Some of the sectors that have been battered the most by high interest rates are finally able to gain traction again as we move into 2025,” said Diane Swonk, chief economist at KPMG.