U.S. underlying growth set to slow after strong private demand in Q3, Pantheon says

The U.S. economy is likely to lose momentum after a third quarter in which private demand was strong, even as headline growth looks in line with trend, Pantheon Macroeconomics said.

Pantheon provisionally expects gross domestic product to grow at an annualised rate of 2.5% in the third quarter, roughly in line with the economy’s trend rate and below the 3.2% consensus forecast ahead of Thursday’s advance GDP release.

Final sales to private domestic purchasers, a measure of underlying growth, are forecast to rise by just over 4.5%, following 4.6% growth in the second quarter. Pantheon cautioned that this measure is a less reliable gauge of underlying growth at present because an unusually large share of investment demand is being met by imports of chips and other technology equipment.

The forecast comes as volatile swings in trade and inventories complicate the outlook for headline growth. Pantheon’s tracking points to net trade and inventories together subtracting just under 2 percentage points from third-quarter GDP growth, although September’s trade and inventory data could materially change its estimate.

The monthly trade deficit averaged $99.2B in July and August, compared with $63.9B in the second quarter.

Private fixed investment is expected to post a quarterly gain of about 9% in the third quarter, its biggest increase since late 2020, according to Pantheon’s tracking model. Equipment investment likely jumped around 20%, with about half of the gain driven by higher spending on imported computer equipment amid the artificial intelligence boom.

Pantheon said tech-linked sectors continued to drive investment growth, while trends elsewhere remained mixed. It assumes investment in intellectual property and software will increase by about 5.5%, noting that reliable indicators for this component are scarce and the advance GDP estimate largely relies on statisticians’ assumptions. It expects nonresidential structures investment to rise by 3.5%.

Residential structures investment, however, likely fell about 1.5%, marking its eighth decline in the past 10 quarters as high interest rates weighed on home sales and construction.

Consumer spending continued at a rapid clip through the summer despite pressure on real incomes from higher energy prices and a subdued labor market.

Pantheon estimates total real spending ticked up by only 0.1% in September, based on its reading of retail sales, although gains in earlier months could leave third-quarter consumption growth at 3.5%. Official personal spending data are due Thursday.

Looking ahead, Pantheon expects growth to moderate as the support from rising stock prices fades, investment growth among AI hyperscalers slows next year and higher borrowing costs constrain spending elsewhere.