This article is written by PNC Chief Economist Gus Faucher.
- Inflation was revised lower in the third estimate for third quarter GDP. In particular, core inflation was 2.0% annualized, at the FOMC’s inflation objective.
- Core inflation is still well above 2% on a year-over-year basis, and the FOMC would like to see a further slowing in this measure before cutting the fed funds rate.
- GDP growth in the third quarter was revised slightly lower.
- Initial claims for unemployment insurance were essentially unchanged in the week ending December 16, and remain very low on an historical basis.
- Continuing UI claims rose in early December, indicating that firms are not laying off workers, but are cutting back on hiring new ones.
There was a substantial downward revision to third quarter inflation in the third estimate for GDP from the Bureau of Economic Analysis. The personal consumption expenditures price index rose 2.6% at an annualized rate in the third quarter, revised lower from 2.8% in the second estimate. The core PCE price index—excluding food and energy, and the Federal Reserve’s preferred inflation measure—was revised down to 2.0%, from 2.3% in the second estimate.
Core PCE inflation in the third quarter was at the Fed’s objective of 2%. While the Federal Open Market Committee would like to see inflation at 2% for more than just one quarter, this is remarkable progress given that core inflation was at 6% annualized in early 2022.
On a year-over-year basis overall PCE inflation was 3.3%, while core PCE inflation was 3.8%. This is still elevated, and the FOMC would like to see a further slowing in year-over-year core inflation toward 2%. But if core inflation remains around 2% on an annualized basis in early 2024, the Federal Open Market Committee could start to cut the fed funds rate in the second quarter of next year. Monetary policy would still be restrictive, weighing on economic growth, and the FOMC might feel comfortable in easing if year-over-year inflation continues to slow.
Real GDP growth in the third quarter was revised somewhat lower, to 4.9% annualized in the third estimate, from 5.2% in the second estimate. GDP growth was reported at 4.9% in the advance estimate.
Compared to the second estimate, there was a downward revision to growth in consumer spending, investment in inventories, and exports. These were partially offset by upward revisions to state and local government spending, business fixed investment, and federal government spending. Imports were revised lower; lower imports add to GDP growth.
Even with the downward revision GDP growth in the third quarter was very strong. Inventories were a big positive in the third quarter, adding 1.3 percentage points to annualized growth. But demand was still solid in the third quarter. Final sales of domestic product—GDP minus the change in inventories, which measures demand for U.S.-produced goods and services—increased a very good 3.6% in the third quarter.
GDP growth will be weaker but still positive in the fourth quarter as inventories will be a drag and demand will soften somewhat. Consumers continue to spend thanks to the strong labor market.
Initial claims for unemployment insurance were 205,000 in the week ending December 16. This was up slightly from 203,000 in the previous week (revised incrementally higher from 202,000). The four-week moving average of claims, which smooths out some of the volatility, was 212,000 in the week ending December 16, down 1,500 from the previous week.
Continuing claims were 1.865 million in the week ending December 9, down 1,000 from the previous week. The four-week moving average of continuing claims was 1.878 million in the week ending December 9, up by 6,000 the previous week and the highest number since December 2021.
Continuing claims for unemployment insurance have risen in the fall of 2023. At the same time initial claims are down from around 250,000 per week in mid-2023, and near decades-long lows. This indicates that few workers are losing their jobs, but that those who do lose them are taking longer to find new ones. This suggests that businesses are not laying off workers but are cutting back on hiring. This is consistent with slower but still positive employment growth as seen in the monthly jobs numbers. This is the gradual easing in the labor market that the FOMC would like to see.