The United States economy demonstrated remarkable resilience in the third quarter of 2023, posting a growth rate of 4.3%, significantly outpacing analysts’ expectations of 3.3%. Underlying this stellar performance are a few important factors. Fueling this success are robust investments in artificial intelligence (AI), booming corporate profits, and resilient consumer spending. As economic data continues to unfold, market reactions have been swift, reflecting the evolving landscape.
Last week, the federal government caught analysts flat-footed by releasing a dramatic positive GDP growth figure. The surprise announcement kicked off a whirlwind of activity in our financial markets. Investors leaped on the bullish economic indicators. Rising corporate profits and booming consumer spending stoked their enthusiasm, both key engines of economic growth. This sudden, unanticipated boom has led everyone from the media to Congress to investigate what exactly pushed the economy forward.
AI investment has been at the helm of enhancing not just production, but creativity, in numerous fields. Large corporations have diverted a great deal of money to technology and innovations that create more efficiencies and boost profit margins. Companies are using generative AI to supercharge those profit-making capabilities. At the same time, they are revving up the economy’s growth engine.
Consumer spending has jumped as well, showing a historic level of confidence from an optimistic consumer sector. When wages are increasing and jobs are growing, consumers feel good and are ready to spend, which fuels even more growth. Much of this increase in spending is a reflection of the persistent recovery from the pandemic and a testament to the continued strength of the consumer.
Despite this positive economic news, the US dollar experienced a slight easing, even as market participants anticipated a more hawkish stance from the Federal Reserve. Fed Chair Powell and other members have reaffirmed that the Fed is highly attuned to inflation, especially in light of the recent economic performance. The probability of a rate cut in January is down to 15%. According to futures markets, there is an 80% chance of a rate cut by June. These dynamics combine to make a particularly tricky backdrop for monetary policy as the Fed tries to balance the need to stimulate growth and not fuel inflation.
Reacting to the positive GDP data, the US two-year treasury yield shot up over 3.50%. Yields are very sensitive to changes in macro-economic expectations, and those moves usually represent a change in net investor perception about the time path of interest rates. The move higher in yields is a clear sign that markets are recalibrating what’s priced in as they begin to digest the stronger economic data recently.
In addition to all the drama surrounding interest rates and U.S treasury yield, gold has taken hold of the financial markets’ imagination. The exclusive metal has surged above $4,500 an ounce – set new all-time record highs over 50 times this year, just this year alone. This increase translates to an over 70% increase since the start of 2023. In times of uncertainty, investors often turn to gold. Its role in recent market performance has only furthered its safe-haven attractiveness.
Silver has also beaten gold on the percentage gain, with silver showing a solid 150% increase since early this January. This incredible boom reflects an increasing demand for precious metals. The investor community is competing in this space to safeguard investments from the impact of recessions and inflation. That said, trading volumes for these metals are still quite thin, around 30-35% below the one month average.
At the same time, US equity indices have surged due to better than expected earnings results and robust consumer spending data. The double whammy of soaring corporate profitability and a surge in consumer spending have created an upbeat backdrop for stock market performance. Investors have been quite excited over all of these developments, solidly raising all the major indices and showing a bullishness towards the future economic climate.
Analysts have been cutting through the smoke to explain what this torrid GDP growth actually means. In the weeks ahead, they’ll turn to how each of these trends will shape Federal Reserve policy moving forward. With inflation concerns lingering and employment numbers indicating a tightening labor market, policymakers face challenges in balancing growth with price stability.