The U.S. economy is expected to have experienced significant growth in the third quarter of this year, driven by a surge in consumer spending, a rise in residential construction, and solid business investment.

According to economists surveyed by FactSet, they predict that the real gross domestic product (GDP) of the United States grew at an annual rate of 3.8% from July to September, surpassing the revised pace of 2.1% in the second quarter. If this holds true, it would mark the sharpest quarterly growth since late 2021, when the economy rebounded after the initial reopening from Covid-19 restrictions and companies embarked on a massive inventory rebuild, resulting in a growth rate of 7%.

The official GDP figures will be released by the Commerce Department on Thursday at 8:30 a.m.

Forecasts, however, vary among different sources. The Nowcast model from the New York Fed predicts a 2.5% growth rate for the third quarter, while Atlanta's GDPNow tool suggests a more optimistic figure of 5.4%. Therefore, there is potential for an upside or downside surprise compared to the consensus.

Nonetheless, even if the actual data falls within the range of these two models, it will still indicate a notable acceleration from the previous quarter and indicate a robust expansion overall. Economists at BNP Paribas believe that such impressive growth in the third quarter may even lead to an upward revision of forecasts for the fourth quarter.

Economists argue that a strong performance in the third quarter can be attributed to positive contributions from all major components of GDP, including lower imports, higher exports, and replenishment of inventories. Notably, consumer spending will be the primary driver of growth, as increasing wages contribute to strong demand in sectors like travel, leisure, and hospitality.

Despite the impressive growth, economists anticipate a slowdown in the final months of the year. The growth rate in the fourth quarter is expected to be significantly lower than that of the third quarter due to a combination of decelerating income growth and what Gregory Daco, the chief economist at EY-Parthenon, refers to as "price fatigue."

In conclusion, the U.S. economy is poised for rapid expansion in the third quarter, driven by robust consumer spending, increased residential construction, and solid business investment. While forecast variations exist, a strong growth figure will indicate an overall acceleration from the second quarter. However, economists anticipate a subsequent slowdown in the fourth quarter due to factors such as slowing income growth and consumer fatigue from rising prices.

Economic Outlook: Third Quarter Spending and Headwinds

The spending patterns of consumers in the third quarter are not sustainable, according to economist Daco. A significant portion of consumer spending during this period involved one-time events such as concerts and movie premieres. This type of spending does not contribute to future growth and can actually have a negative impact on subsequent quarters.

In addition to the unsustainable spending, there are other economic challenges emerging. Geopolitical tensions are causing uncertainty and could potentially reduce demand. More households are allocating larger portions of their money towards debt payments. Furthermore, the Federal Reserve's efforts to slow down the economy are beginning to take effect, especially when it comes to elevated interest rates.

The BNP Paribas team expressed their belief that this pace of growth cannot be sustained under current monetary policy conditions.

Despite these challenges, a strong growth figure for the third quarter will be a positive sign for the economy. It suggests that a recession is not imminent and that consumers, in general, are financially stable. However, it's important to recognize that GDP data is retrospective, and even if the recent data shows exceptional strength, it is unlikely to influence the Federal Reserve's decision on interest rates during their upcoming meeting scheduled for October 31st to November 1st.

Officials from the Federal Reserve have already indicated that they are likely to keep rates stable during the meeting, even with the recent strong economic data. Their cautious approach is influenced by the desire to observe how the economy continues to respond to higher interest rates.

Daco believes that the Fed should acknowledge the robust third quarter growth, but also consider the fact that we are now looking at a different economic landscape.