The US just got another stellar update on the state of the economy. Real gross domestic product expanded at a 2.8% annualized pace in the third quarter, and a key measure of inflation fell to within a whisker of the Federal Reserve’s target. That’s the stuff of sustainable expansions that “lift all boats” and drive real wages higher — a combination that many policymakers dream of. It would be a shame to change course now, but the looming election suggests we’re a coin flip away from doing just that.
Under the surface, the strong third-quarter economy was powered by the best consumer spending advance since early 2023. Also remarkable was the ongoing trend in business investment, led by outlays related to the artificial intelligence arms race. Meanwhile, the core personal consumption expenditures deflator — a measure of inflation favored by policymakers at the Fed — rose at just a 2.2% annualized pace from the previous three-month period. The industrial policies of President Joe Biden probably played some proactive role in all of this by marshaling a manufacturing construction renaissance, but the Biden-Harris administration also deserves some credit for simply staying out of the way as market forces adapted and the Fed did its job. Sometimes the best role for government is on the sidelines.