Thanks to Taylor Swift, Beyonce, and "Barbenheimer," "funflation" helped fuel economic growth
US gross domestic product (GDP) soared to a high 4.9% annualized rate in the third quarter fueled by strong consumer and government spending, according to the latest advanced estimate released by the Bureau of Economic Analysis (BEA) today (Oct. 26). That’s the highest since the end of 2021 and a big uptick from 2.1% in the previous quarter.
Perhaps Taylor Swift, Beyonce, and Barbenheimer “funflation” had something to do with the $8.5 billion addition to the third quarter economy—half the GDP growth was driven by consumer spending.
“A large chunk of that strength came from temporary factors — the ‘Barbenheimer’ summer blockbusters, and concert tours by Taylor Swift and Beyonce—as well as factors that don’t necessarily reflect underlying strength, such as a build-up of retail inventories,” said Bloomberg economist Eliza Winger.
BEA also cited some other leading contributors to spending: prescription drugs, cars, housing, health care, and insurance.
Core personal consumption expenditures rose 2.4% in the third quarter, just under estimates, a downturn from 3.7% in the previous quarter, and 5.0% in the first quarter.
Tom Graff, head of investments at financial planning firm Facet, isn’t fazed about the numbers.
“Overall, we think the economy has gone from red hot to solidly growing. But it stands to reason that if the economy is just ‘solid growth’ [it] should be consistent with a normal inflation rate,” he said.
Graff believes the Federal Reserve is “done hiking rates for this cycle,” pointing to recent comments by Fed Officials on their wait-and-see stance and his expectation that inflation will continue to fall.
This is consistent with the Wall Street consensus that the Fed will hold rates steady in the next policy meeting next week on Nov. 1.
With the 10-year Treasury yields hovering below 5% but still at a multiyear high, investors are left with the question of their 60/40 portfolio strategy.
“Historically stocks have never been down over a two-year period without a recession occurring at some point over those two years,” said Graff.
He added as long as the economy keeps growing, stocks will rise too. But he is bullish on bonds due to the higher yields and optimistic on the Fed being done with rate hikes.
“[Y]ou are getting paid a very attractive yield and the ability for bond prices to keep falling is probably capped. That’s a pretty nice combination,” he said.
Michael Rosen, chief investment officer at Angeles Investments, is bullish on stocks. “Equities are driven by profits, and profits are strong. So, we remain fully invested,” he said.
Rosen liked the 60/40 portfolio as rising bond and stock prices moved together, but, he laments, “that era is over.”
“Higher inflation will be a headwind to bonds, so the traditional mix that has worked so well for so long will no longer be the optimal approach,” he said, suggesting alternatives to traditional bonds, with structured credit and private credit to be added in place of long duration government bonds.
Rosen also likes cash “for its optionality, liquidity, and higher yield.”
The third quarter GDP figures were largely expected, but analysts are predicting a sharp downturn as the holiday season approaches.
Morgan Stanley $MS is expecting an upcoming slowdown—its GDP tracker is estimating 0.7% growth in the next quarter—while economist Mohamed El-Erian expects slowing through next year.
“What it won’t do is signal equally robust growth in 2024,” he posted on X $TWTR.
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