Economy Statement by Eric Van Nostrand, Acting Assistant Secretary for Economic Policy, for the Treasury Borrowing Advisory Committee

Introduction

The United States continues to deliver strong economic growth amid resilient labor markets, even as core inflation continues to cool. In the third quarter, real GDP grew at the fastest rate since late 2021, boosted by strong household consumption and a stronger build in private inventories. Labor force participation rate rose to a post-pandemic high while the prime-age participation rate (those aged 25 to 54) advanced to its highest level in more than two decades. Meanwhile, inflation has trended lower year-over-year—though energy did bump up average monthly headline inflation in the third quarter.

The especially fast pace of growth in the third quarter is likely to ease in the coming quarters, even as the economy continues to grow. Surveys of private forecasters report GDP growth is expected to soften to 0.7 percent in fourth quarter of 2023 and 1.0 percent over the four quarters of 2024. This slowing, if realized, would suggest that demand and supply are coming into better alignment, easing inflationary pressures and signaling—as the Biden Administration’s policies have aimed to deliver—that slower price growth is attainable without pulling the economy into recession.

Real Gross Domestic Product (GDP)

Real GDP growth more than doubled in the third quarter of 2023 to 4.9 percent at an annual rate, picking up smartly from a 2.1 percent gain in the second quarter (see Table 1 – Real Gross Domestic Product). Robust growth in consumption and an upturn in private inventory investment propelled the acceleration, along with increased contributions from government spending.

It is useful to decompose GDP into four components: (1) private domestic final purchases (PDFP), the most persistent and stable components of output, including personal consumption, business fixed investment, and residential investment; (2) government consumption and investment; (3) net international purchases; and (4) intermediate demand (or the change in private inventories). Examined separately, each component delivers specific information about activity in various sectors that can be useful in predicting the future path of growth.

PDFP is an especially important component of GDP: it measures the private sector’s capacity to drive self-sustaining growth and, therefore, can signal the direction of future economic performance. In the third quarter, real PDFP growth accelerated to 3.3 percent at an annual rate and contributed 2.8 percentage points to total GDP growth. Changes in the components of PDFP were largely positive. Personal consumption expenditure (PCE) growth quadrupled from the second to the third quarter as resilient households increased their spending. Motor vehicle and parts purchases turned from a 9.1 percent annualized drop in the second quarter to 1.3 percent growth in the third, accounting for half of the contribution from durable goods to GDP growth. Nondurable goods consumption also grew more rapidly, led by prescription drug purchases and clothing sales, even as expenditures on gasoline and other energy goods declined. Meanwhile, the pace of growth in consumption of services more than tripled, largely due to three service sectors: housing and utilities, food services and accommodations, and other services.

Business fixed investment declined slightly in the third quarter, as spending on structures slowed and spending on equipment fell. The decline in equipment spending mostly reflected a reversal in investment in transportation equipment. Investment in structures continued to slow—albeit from a double-digit surge in the first half of the year—as the pace of construction in the manufacturing sector moderated; however, factory investment continued to set new records in the third quarter.

The final component of PDFP, residential investment, registered growth in the third quarter for the first time since early 2021. The upturn was largely driven by permanent site construction while spending on other structures, a category that includes brokers’ commissions and home improvements, continued to decline.

Two of the other three components of GDP made positive contributions to third quarter growth. Total government spending growth accelerated noticeably in the third quarter, with most of the increase reflecting a faster pace of federal spending on national defense while the growth rate of state and local gross investment softened. International trade was a net negative contributor to real GDP growth as import growth outweighed the increase in exports. Meanwhile, the change in private inventories, which can exhibit wide swings from quarter to quarter, made a large contribution in the third quarter, adding 1.3 percentage points to growth after a neutral impact in the second quarter. The contribution largely reflected a slower drawdown in wholesalers’ inventories of nondurable goods.

Labor Markets

Robust payroll job creation persisted in the third quarter of 2023, attesting to sustained demand for labor even as signs of easing expanded (see Table 2 – Labor Market Indicators). The average pace of payroll job creation accelerated in the third quarter to 266,000 per month, up from the second quarter average of 201,000 per month. These paces of employment growth are well above those needed to match population growth and maintain a stable unemployment rate. At the same time, improved labor force participation pushed up the headline unemployment rate by 0.2 percentage points over the third quarter to 3.8 percent. Although the September reading was the highest unemployment rate since February 2022, it was still below what many economists consider the natural rate of unemployment, or the rate at which inflation is stable and labor markets balanced. An alternative measure of labor underutilization, the underemployment rate which also includes those working part-time for economic reasons and those marginally attached to the labor force, stepped up to a still-low 7.0 percent at the end of the third quarter. This broadest measure of labor underutilization has held below the 2019 average rate of 7.2 percent since March 2022. Meanwhile, early fourth quarter data suggest continuing labor market strength. Workers filed 210,000 initial unemployment claims in the week ending October 21, which is 3.7 percent below the average of comparable weeks in 2018 and 2019. Continuing claims, however, have gradually risen through 2023 and have exceeded pre-pandemic levels since May. As of the week ending October 14, they were 13.9 percent higher than an average of comparable weeks in 2018 and 2019. Even so, continuing claims remain at a low level and are consistent with a strong labor market.

Third-quarter measures of labor supply showed further, broad-based improvement. After holding at 62.6 percent for the five months through July, the labor force participation rate (LFPR) for all workers moved up to 62.8 percent in August, where it remained in September. This participation rate is just 0.5 percentage points below that in January and February 2020, just before the COVID-19 pandemic. At the same time, the LFPR for prime-age workers consolidated the substantial gains made since November 2022. In September 2023, the prime-age LFPR stood at 83.5 percent, matching the 21-year higher achieved in the second quarter. Among prime-age workers, the LFPR for men rose to 89.6 percent in September—returning to the nine-year high in April 2019—but the LFPR for women decreased 0.4 percentage points to 77.4 percent, slipping from the record-high reached in June. The participation of older workers was perhaps the most noteworthy of labor market trends in the third quarter: after trending lower during the first and second quarters, the LFPR for workers aged 55 years and older rose 0.5 percentage points over the third quarter to 38.8 percent, the highest level this year.

While the supply of labor increased in the third quarter, the demand for labor eased further, albeit slowly. Data for the first two months of the third quarter (latest available) showed that the average number of job openings fell to 9.3 million, down 700,000 from the average in the first two months of the second quarter. Taking a longer-term view, job openings peaked at 12.0 million in March 2022 and have been trending lower since then, falling to 8.9 million in July 2023. Although there was a surge in job openings in August 2023, it was isolated to a single sector and may be reversed in coming reports. As of August, there were 1.5 job openings per unemployed worker, down by 0.1 from the corresponding month in the second quarter. Although above the pre-pandemic ratio of 1.2 vacancies per unemployed worker, the latest ratio is a notable decline from the peak of 2.0 in March 2022, indicating that labor demand and supply are realigning.

Inflation

U.S. inflation has declined by more than 5 percentage points from its peak in 2022, even as headline inflation in the third quarter rose a bit; however, core inflation was stable. As measured by the consumer price index (CPI), the average rate of monthly inflation during the third quarter was 0.4 percent, up from 0.2 percent during the second quarter (see Table 3 – Inflation and Wage Growth Indicators). Energy prices rose an average of 2.4 percent per month in the third quarter, reversing from a 0.8 percent average monthly decline in the second quarter. Recent energy market developments reflect competing market forces: Saudi Arabia and Russia extended their oil production cuts to the end of 2023, OPEC+ producers have reduced output by more than 2.5 million barrels per day, and conflict in the Middle East has added uncertainty to oil supply—all of which have put upward pressure on energy prices. On the other hand, non-OPEC+ countries have boosted output, and slowing economic growth worldwide portends lower energy demand—which has mitigated some of the upward price pressures. For the other non-core components of inflation, average monthly food inflation ticked up in the third quarter to 0.2 percent after slowing noticeably in the second quarter. Over the year through September 2023, however, food price inflation dropped to a more-than-two-year low of 3.7 percent.

Excluding energy and food, core consumer price inflation was stable between the second and third quarters, masking pronounced disinflation in core goods prices and a marked acceleration in core services prices. Over the third quarter, core inflation averaged 0.3 percent per month, matching the second quarter’s rate. Core goods prices fell, partially reflecting persistent declines in used car and truck prices. Meanwhile, after slowing noticeably in the second quarter, inflation for core non-housing services accelerated noticeably in the third quarter, in part due to hefty gains in transportation services prices. Sustained upward pressure from rent of housing services (rent of primary residential and owners’ equivalent rent), which is the largest share of core inflation, continues to set a high floor to core inflation. Although rent of housing inflation remains elevated, it was stable between the second and third quarters and has trended down on a year-over-year basis.

Inflation as measured by the PCE price index assigns different weights for different components and uses a different methodology in its calculation than the CPI. Nonetheless, the drivers of both measures of inflation and the patterns in the third quarter are broadly similar.

Housing Markets

Further tightening of monetary policy and rising mortgage rates weighed on housing activity in the third quarter.

New Residential Construction: Growth of new home construction was mixed in the third quarter as the divergence between the single-family and multi-family sectors widened (see Table 4 – Housing Market Indicators). New single-family home construction continued to grow in the most recent quarter, albeit at a slower pace. Growth of single-family building permits—which precede future single-family construction—remained positive in the third quarter but slowed to about half the second quarter’s pace. On the other hand, the third-quarter decline in multi-family permits was about one-seventh the drop in the second quarter. Meanwhile, the growth rate of single-family housing starts was less than half that in the second quarter and was more than offset by a very steep decline in starts in the volatile multi-family sector.

Despite recent retreats in multi-family permits and starts, activity in this sector is still supported by construction backlogs. The number of new multi-family units that have been authorized but not started increased further in the third quarter and is currently more than two-thirds higher than at the end of 2020. The multi-family sector continues to account for about one-half of the total residential construction backlog, up from roughly 40 percent in mid-2021. While the inventory of multi-family homes under construction declined in the third quarter, it was down only slightly from the record high reached in the second quarter. Meanwhile, completions for multi-family homes fell somewhat in the third quarter but remained above pre-pandemic norms.

Homes Sales and Inventories: Sales of total existing homes continued to decline in the third quarter: the number of existing homes available for sale fell by more than 8 percent over the year ending in the third quarter. High mortgage rates have restricted inventories of existing homes for sale as homeowners remain reluctant to abandon mortgages contracted at record, or near-record, low rates.

Accordingly, would-be homeowners have shifted to the new home market: sales of new single-family homes have risen for five consecutive quarters, with growth accelerating to 3.6 percent in the third quarter from 2.2 percent in the previous quarter. The upward trend in sales since the summer of 2022 has weighed on the inventory-to-sales ratios for new homes: the number of months of sales that current inventories can meet. From a post-pandemic peak of 10.1 months in July 2022, the ratio dropped to a 19-month low of 6.9 months of supply as of September 2023.

Home Prices and Rents: Home price inflation continued at rapid paces in the third quarter (see Table 5 – Home Price and Rent Indicators). The S&P/Case-Shiller’s national home price index slowed marginally in July (last available data as of October 30) as did the composite 20-city home price index—though the latter still indicated a double-digit annualized growth rate. Meanwhile, the FHFA purchase only-index accelerated again in July. Both the S&P/Case-Shiller’s national home price index and the FHFA’s measure stood at fresh record highs at the start of the third quarter.

For renters, shelter cost growth eased at the margins but remained elevated. The CPI for rent of primary residence rise by 5.7 percent at an annual rate in the third quarter, a pace that was marginally slower than in the second quarter. However, measures of new rental agreements suggest a favorable outlook for the rent CPI, which is a lagged measure and trails prices from rental unit listing services by about a year. Listing services data indicate that rental inflation slowed significantly in the third quarter—especially compared to 2022—which may suggest further easing of shelter inflation in the future.

Risks to the Outlook

Inflation: Inflation has fallen meaningfully from the highs of mid-2022, but it remains above pre-pandemic rates and the Federal Reserve’s target. While energy prices remain down on a year-over-year basis, the future paths of energy and food prices remain highly uncertain and face further risk from geopolitical developments in the months ahead. Adverse shocks—including those related to Russia’s ongoing brutal war in Ukraine and recent conflict in the Middle East—could result in temporary boosts to near-term headline inflation and eventual passthrough to core components of inflation. Excluding food and energy prices, core inflation is likely to stay above the Federal Reserve’s 2-percent target throughout 2023, reflecting rising prices for housing and other core services. House prices have begun to rise recently despite high mortgage rates, primarily due to low supply, but rental inflation is expected to ease in the coming months based on market data showing slower rises in rents for new leases. While recent economic data have pointed towards a resilient labor market, elevated price growth and an environment of persistently high interest rates creates the risk of a sudden reversal and downturn.

Geopolitical Instability and Global Slowdown: Russia’s war in Ukraine continues to add uncertainty to the medium-term outlook. In addition, the outbreak of conflict in the Middle East exacerbates existing risks and creates further concerns of oil production disruptions and upward pressure on headline inflation. Fortunately, major impacts to U.S. economy have not materialized to date, but these remain important risks to monitor. In addition, uncertainty about China’s economic prospects has created concern about global demand in the coming months. At the same time, central banks around the world are continuing to tighten monetary policy to fight high global rates of inflation. A potential slowdown in global economic activity may feed back into the U.S. economy by weakening international demand for U.S. goods and service exports.

Potential Federal Government Shutdown: Discretionary federal spending is currently funded by a continuing resolution that expires on November 17^th. Without further legislative progress on appropriations or another continuing resolution, a complete government shutdown will occur after that date. A shutdown poses severe risks to American households: each passing week of a shutdown raises the economic cost in an unpredictable manner due to persistent disruptions of federal programs, delayed paychecks for federal workers, and potentially lost income for federal contractors.

Tighter Financial Conditions: In addition to the major factors listed above, there are stress points affecting the financial system and consumers which could accumulate and result in substantial economic headwinds. In the financial sector, a high interest rate environment is putting pressure on deposits and heightening the risk of asset and liability mismatches at banks, while exposure to commercial real estate loans creates risk of a crisis in the case of an extended downturn. For consumers, a general deterioration of credit conditions, combined with the resumption of student loan payments and reduced savings, reflect a further tightening of financial conditions. These dynamics—along with other factors such as the auto workers strike, a potential government shutdown, and potential weakness in the labor market—could lead to depressed demand.

Conclusion

The American economy remains strong, and the Biden-Harris Administration has made significant investments to lower costs, boost economic potential, and make our economy more resilient to risks. The data show that these investments are paying off and that the U.S. economy remains on the path of easing inflation with a healthy labor market.

Table 1 – Real Gross Domestic Product

	Percent Change (annual rate)		Contribution to GDP Growth (percentage points)	Percent Change (Q4 / Q4)
	2023 Q2	2023 Q3	2023 Q3	2021	2022
Real GDP Growth	2.1	4.9	—	5.4	0.7

Private Domestic Final Purchases (PDFP)	1.7	3.3	2.8	6.5	0.8

Personal Consumption Expenditures (PCE)	0.8	4.0	2.7	7.2	1.2
Goods	0.5	4.8	1.1	6.6	-0.6
Services	1.0	3.6	1.6	7.6	2.1

Business Fixed Investment	7.4	-0.1	0.0	4.9	5.6
Equipment	7.7	-3.8	-0.2	1.4	5.3
Structures	16.1	1.6	0.1	-0.9	0.8
Intellectual Property Products	2.7	2.6	0.1	11.6	8.3

Residential Investment	-2.2	3.9	0.2	0.4	-17.4

Total Government Purchases	3.3	4.6	0.8	-0.2	0.8
Federal	1.1	6.1	0.4	0.6	-0.1
State and Local	4.7	3.7	0.4	-0.6	1.3

Net Exports (billions of real (2017) dollars)	-928	-938	-0.1	-187	30
Imports (percent change, annual rate)	-7.6	5.7	-0.1	11.1	2.1
Exports (percent change, annual rate)	-9.3	6.2	0.0	6.7	4.3

Change in Private Inventories (billions (2017) dollars)	15	81	1.3	121	-55

Source. Bureau of Economic Analysis, Gross Domestic Product (Advance Estimate), Third Quarter 2023.
* Percentage point contribution to GDP growth.

Table 2 – Labor Market Indicators

Establishment Survey	2023 Q2	2023 Q3	2021	2022
	Average Monthly Change (thousands)		Annual Change (December – December)
Payroll Employment	201	266	7267	4793

Private Sector	173	195	6882	4518
Manufacturing	3	9	385	390
Construction	22	20	239	265

Service Providing	146	166	6236	3814
Education and Health Services	81	90	544	935
Leisure and Hospitality	22	59	2478	1058
Temporary Help Services	-21	-12	333	-30

Government	28	71	385	275
State and Local Education	-2	39	419	114

Household Survey	2023 Q2	2023 Q3	2021	2022
	Monthly Average		Annual Change (December – December)
Household Employment (% Total Population)	60.3	60.4	2.1	0.6
Prime-Age (% of Population Ages 25 to 54)	80.8	80.9	2.8	1.0
55+ (% of Population Ages 55+)	37.4	37.7	1.1	0.4

Unemployment Rate, U-3 (% of Total Labor Force)	3.6	3.7	-2.8	-0.4
Underemployment Rate, U-6*	6.7	6.9	-4.4	-0.8
Long-Term (27+ weeks)	0.7	0.7	-1.3	-0.6

Labor Force Participation Rate (% Total Population)	62.6	62.7	0.5	0.3
Prime-Age (% of Population Ages 25 to 54)	83.4	83.5	0.9	0.5
55+ (% of Population Ages 55+)	38.4	38.7	-0.1	0.3

Job Openings and Labor Turnover Survey	2023 Q2	2023 July – Aug	2021	2022
	Monthly Average		Annual Change (December – December)
Job Openings (thousands)	9700	9265	4972	-592

Private Sector	8612	8258	4543	-595
Professional Business Services	1649	1687	663	-82
Education and Health Services	1998	1911	921	-100
Leisure and Hospitality	1311	1204	1068	21

Separations Rate (% of Payroll Employment)	3.7	3.6	0.1	-0.3
Quits Rate	2.5	2.3	0.5	-0.3
Layoffs and Discharges Rate	1.0	1.1	-0.4	0.1

Job Openings per Unemployed Person	1.64	1.52	1.23	0.09

Sources. Bureau of Labor Statistics, The Employment Situation – September 2023; Job Openings and Labor Turnover – August 2023.

¹ The U6 measure is the broadest measure of unemployment, and includes those marginally attached to the labor force as well as those working part-time for economic reasons.

Table 3 – Inflation and Wage Growth Indicators

Inflation	2023 Q2	2023 Q3	2021	2022
	Average Monthly Percent Change		Percent Change (December / December)¹
Consumer Price Index (CPI)	0.2	0.4	7.0	6.5
Foods	0.1	0.2	6.3	10.4
Energy	-0.8	2.4	29.3	7.3

Core (ex. Food and Energy) CPI	0.3	0.3	5.5	5.7
Core Goods	0.4	-0.3	10.7	2.1
Core Services ex. Rent of Shelter²	0.1	0.4	3.7	6.2
Rent of Shelter	0.5	0.5	3.7	7.7

PCE Price Index	0.2	0.3	6.2	5.4
Core PCE Price Index	0.3	0.2	5.2	4.9

Wages and Earnings	2023 Q2	2023 Q3	2021	2022
	Percent Change (annual rate)		Percent Change (December / December)
Average Hourly Earnings (AHE), Total Private³	4.9	3.4	5.0	4.8
Good Producing	6.1	5.0	4.7	4.5
Services Providing	4.5	3.0	5.1	4.8

Employment Cost Index (ECI), Wages & Salaries, Total Private⁴	4.1	—	5.0	5.1
Good-Producing Industries	2.6	—	4.0	4.9
Service-Providing Industries	4.6	—	5.2	5.2

Real AHE, Private³	2.2	-1.4	-2.0	-1.6
Good Producing	3.3	0.0	-2.3	-1.9
Services Providing	1.8	-1.8	-2.0	-1.4

Sources. Bureau of Labor Statistics, Consumer Price Index – September 2023; The Employment Situation – September 2023; Employment Cost Index – June 2023. Bureau of Economic Analysis, Personal Income and Outlays, September 2023.

¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from CPI Data.
³ All private, non-farm employees.
⁴ ECI for Q3 will be published on Tuesday, October 31, after the TBAC Economy Statement is published.

Table 4 – Housing Market Indicators

New Residential Construction	Sept ’23	2023 Q2	2023 Q3	2021	2022
	Thousands	Average Monthly Percent Change		Percent Change (December / December)
Building Permits, Total	1471	0.1	0.7	10.7	-27.7
Single-Family	963	3.7	1.4	-7.2	-34.8

Units Authorized but Not Started, Total¹	281	-2.2	1.1	40.4	10.6
Single-Family¹	142	1.7	0.5	34.3	-1.4

Housing Starts, Total	1358	0.9	-1.4	7.5	-24.1
Single-Family	963	3.3	1.2	-7.2	-27.1

Units Under Construction, Total¹	1676	0.2	-0.3	20.9	11.1
Single-Family¹	674	-1.1	-0.5	27.0	-1.8

Housing Completions, Total	1453	-0.8	-0.9	-3.5	4.0
Single-Family	998	-0.9	-0.3	7.4	-2.5

Home Sales	Sept ’23	2023 Q2	2023 Q3	2021	2022
	Thousands	Average Monthly Percent Change		Percent Change (December / December)
Existing Homes, Total	3960	-2.1	-1.6	-6.1	-34.0
Single-Family	3530	-2.3	-1.7	-6.2	-33.5

New Homes, Single-Family	759	2.2	3.6	-4.9	-23.4

Inventories of Home for Sale	Sept ’23	2023 Q2	2023 Q3	2021	2022
	Thousands	Average Months’ Supply (inventory / sales)		Change in Month’s Supply (December / December)
Existing Homes, Total	1130	3.0	3.3	-0.2	1.1
Single-Family	1000	3.0	3.3	-0.1	1.1

New Homes, Single-Family	435	7.4	7.2	1.5	2.9

Sources. Census Bureau, Monthly New Residential Construction, September 2023; Monthly New Residential Sales, September 2023. National Assocation of Realtors, Existing-Home Sales.
¹ Units at the end of the period, levels not at an annual rate

Table 5 – Home Price and Rent Indicators

Home Price Indices (HPI)	2023 Q2	2023 Q3	2021	2022
	Percent Change (annual rate)		Percent Change (December / December)
S&P Core Logic Case-Shile National HPI^1,2	8.8	8.1	19.0	5.7
Composite 20-City HPI^1,2	11.6	11.0	18.6	4.8

FHFA Purchase-Only HPI¹	8.3	10.4	17.9	6.8

Zillow Total Home Value Index (HVI)	5.5	6.0	15.9	9.9
Bottom-Tier Homes HVI	8.4	7.0	13.7	10.7

Rent Indices	2023 Q2	2023 Q3	2021	2022
	Percent Change (annual rate)		Percent Change (December / December)
CPI Rent of Primary Residence	6.2	5.7	3.3	8.4

Zillow Observed Rent Index	7.2	4.0	15.3	7.9

Sources. Standard & Poor’s, S&P CoreLogic Case-Shiller Home Price Indices. Federal Housing Financing Agency, Home Price Index (HPI) Monthly Report. Zillow, Housing Data. Bureau of Labor Statistics, Consumer Price Index – September 2023.
¹ Annualized monthly rate through July. S&P and FHFA house price indices next published on October 31.
² 12-month percent change not seasonally adjusted.