Strong consumer spending continues to bolster GDP

If gross domestic product is the measure of how well the economy is doing, then the economy is doing pretty well. The report out Wednesday shows GDP was up 2.8% in the third quarter, marking about two years now of strong growth. What has continued to prop it up? Consumer spending.

Which presents a question about balance. Because if you’re the Federal Reserve, you want consumers to spend and keep the economy strong, but not spend so much that it drives up inflation again.

The sweet spot for consumer spending? There is no simple answer. Because the sweet spot depends on what else is happening in the economy, said Jonathan Parker, an economist at the Massachusetts Institute of Technology.

“Ideally, you just want balanced growth,” Parker said. “You want growth in investment and consumption.” That’s consumption, the consumer spending part, and investment, business spending, which has also been strong. 

“We produce stuff,” Parker said. “We get stuff done and we put people to work.”

A stark contrast to the deep pandemic days, when there were too many people chasing too few goods and not enough workers to get it all done. 

Julie Smith, an economist at Lafayette College, said a key element in achieving balance is people spending not too little, not too much.

“I think a lot of that has to do with how they are feeling about the economy,” Smith said. And the consumer confidence numbers out this week say that “people are generally feeling OK to positive about the economy.”

“OK to positive” might not sound like a glowing review, but it might just be the review the Fed needs. It could mean, for instance, that consumers feel confident enough about their jobs to keep spending, but not so confident that they’re job hopping for raises, which can increase inflation.

Jim Wilcox, an economist at the University of California, Berkeley, said the current equilibrium means consumer spending has fallen into that sweet spot. “The kinds of consumer growth we’re seeing lately are not going to reignite inflation,” Wilcox said.

Spending that’s sort of even keeled allows the Fed to relax a little, at least for now.  

“They do not have to hurry to lower interest rates a lot,” Wilcox said. “And nor are they under much pressure to stop lowering interest rates.”

Which he said puts the Fed on track to cut by a quarter of a percentage point next week.