U.S. Economy Continues to Grow, Easing Stagflation Fears

Seven months after the advance estimate of Q1 2023 GDP growth (which was later revised upwards by 1.1 percentage points) sparked fears of stagflation in the United States, the latest estimate of Q3 2023 GDP growth, released on Wednesday, put those fears to rest for the time being. Annualized real GDP growth accelerated to 5.2 percent in the third quarter of 2023, the Bureau of Economic Analysis reported, marking the fastest pace of expansion since Q4 2021.

Perhaps even more importantly, the strong GDP report was accompanied by another low increase in the price index for personal consumption expenditure (PCE), the Fed’s go-to inflation gauge. The PCE price index increased at an annual rate of 2.8 percent in Q3 2023. While that marks a slight acceleration from 2.5 percent in the second quarter, mainly due to high gasoline prices in August and September, it's still a sharp deceleration from 4.2 percent in the first three months of 2023. The core PCE index, excluding food and energy, increased just 2.3 percent, down from 3.7 percent in the preceding quarter.

While slowing growth is generally accepted as a necessary evil to bring down inflation, slow growth combined with stubborn or even rising inflation is another story altogether, as it evokes fears of stagflation, the worst of both worlds. Stagflation, a period of slow growth, high unemployment and high inflation, is widely considered one of the worst conditions for an economy to be in, as it limits the instruments available to policy makers. Measures that fight slow growth and unemployment tend to fan inflation, while measures taken to cool inflation stifle economic activity and ultimately lead to unemployment. The latest GDP reading puts stagflation fears to rest for now, while fueling hopes of a soft landing, i.e. a successful fight against inflation without an ensuing recession.