We’re now over a month into the fourth quarter of the fiscal year, which means that the advance estimate for the third quarter (Q3) has just become available. The current assessment has it at 2.9%, which is significantly larger than the third estimate for Q2. What does this mean for the rest of this year, for the coming year, and for the economy in general?
What the Advance Estimate Means
The advance estimate for the GDP in any quarter is the first assessment of how much the Gross Domestic Product increased by in a given three month period. After that, the preliminary estimate is released a month later, followed by the final estimate, which is the most up-to-date figure for the quarter.
The final estimate for Q2 was 1.4%. With that in mind, the Q3 advance estimate of 2.9% is a significant improvement. However, it’s important to note that this figure is based on incomplete data. A more accurate assessment will be available on November 29th, and the final estimate will be released at the end of Q4.
What does this mean? Well, the GDP is a gauge of the health of our nation’s economy. It represents the monetary value of all goods and services produced in a given quarter. Therefore, if the previous quarter was at 1.4%, that means we’ve experienced an estimated 1.5% growth in the last three months. Considering that from Q1 to Q2, it grew by only 0.4%, this would represent a significant improvement in our economy.
What This Means for the Future
Does this unexpected spike in the Gross Domestic Product mean that we should all begin celebrating our stronger economy? Not quite. A higher GDP also means an increased likelihood that the Fed will finally increase the interest rate. So far this year they have declined to do so, but the threat still looms. With the rate hike last December came the promise that they planned to raise it up to four more times in the coming year. Since then, the country has been waiting for the other shoe to drop.
So far, it hasn’t, but there’s an increasing consensus among the Fed that our economy is strong enough to withstand a hike. There’s one more Federal Reserve meeting this year, on December 13th and 14th. Given this significant boost of the GDP, it seems likely another rate hike is on the horizon.
But raising the interest rate has the potential to send our economy right back down again if rate hikes and growth aren’t carefully balanced. Higher interest rates make it more expensive for the average citizen to take out a loan, pay a mortgage or pay down credit card debt. It will eat up a larger portion of the money Americans make, leaving us with less disposable income. If consumer spending dips, businesses suffer and the stock market declines. In order to stay afloat, businesses raise prices. Economic growth slows, and the end result is recession.
A rise in the GDP, in and of itself, isn’t a bad thing. It does signify that the economy is getting healthier. But this particular spike doesn’t have the best timing. It’s great that we’re seeing so much improvement, but at this juncture, it makes a Fed interest rate hike much more likely, which could ultimately hurt us financially.
Of course this is only the advance estimate. The next set of figures may reveal a different growth rate. Frustratingly, we won’t know the final Q3 GDP until after the Fed meeting has already passed. But even so, it provides some insight into what’s in store for the coming year. Forewarned is forearmed. Before the Fed has a chance to raise rates, make sure your investments are secure, especially retirement accounts, against a falling stock market or even an oncoming recession.