Despite persistent inflation and rising interest rates, Americans continued their retaliatory spending in the third quarter, helping the U.S. economy grow at its fastest pace since late 2021.
According to the so-called “advanced” estimate from the U.S. Bureau of Labor Statistics (BLS), real gross domestic product (GDP) grew at an annual rate of 4.9% last quarter. report Thursday. This was up from 2.1% in the second quarter. The Bureau of Labor Statistics explained that the latest data was driven by higher federal and state government spending, increased exports, and business investment in inventories.
The Biden administration was quick to celebrate a surge in U.S. economic growth after years of Wall Street predicting a recession. Since inflation surged to a four-year high of more than 9% in June 2022, experts have repeatedly warned that if the Fed really wants to restore price stability, it may need to raise interest rates until the economy slips into recession. consumer. But President Biden dismissed that idea Thursday.
“I have never believed we needed a recession to lower inflation – and today we saw again that the U.S. economy continues to grow even as inflation has fallen,” he said in a statement. statement. “This is a testament to the resilience of American consumers and American workers underpinned by Bidenomics — my plan to grow the economy by growing the middle class.”
A big surprise for Wall Street
The latest GDP growth surprised many economists and Wall Street analysts, who remain concerned that rising interest rates and stubborn inflation could trigger a recession. Some even think Thursday’s latest gross domestic product report is just a last hurray for a slowing economy.
“Take a close look at Q3 GDP expectations as they could be the highest we’ve seen in a while,” said Mark Hamrick, senior economic analyst at Bankrate.
Hamrick noted that the economy still faces “significant headwinds,” including the Federal Reserve’s “longer-high” interest rate policy, soaring Treasury yields and the possibility of a partial federal government shutdown in November due to the federal budget impasse in Washington. On top of that, the threat of geopolitical instability is rising as the Russia-Ukraine and Israel-Hamas conflicts continue.
“Expectations for the medium term are lower as there are no shortage of sources of uncertainty,” Hamrick said of the economy. “There is no guarantee that the recent strong momentum can be sustained.”
Olu Sonora, head of U.S. economics at Fitch Ratings, believes that GDP data proves that economic growth “shifted from elasticity to re-acceleration” in the third quarter, ignoring the Federal Reserve’s aggressive interest rate hikes. But she warned that the current strength of the economy won’t make the Fed’s job of fighting inflation any easier, and that Fed Chairman Powell could quickly end the streak of economic growth by raising interest rates and keeping them higher. Winning momentum.
“The Fed’s long-term bullish message is likely to be higher for longer,” she warned. “The bottom line is that the durability of this growth spurt is questionable going forward, and above-trend economic growth cannot sustainably coexist with an increasingly restrictive interest rate environment.”
Economists say not to get too excited
Despite the strong GDP report, many economists were quick to issue warnings after the GDP report was released on Thursday. Although consumer spending increased at an annual rate of 4% last quarter, the largest increase since the fourth quarter of 2021, LPL Financial chief economist Jeffrey Roach believes that this is the last time for consumers tone. “The real question is whether this trend can continue in the coming quarters, and we don’t think it will,” he said.
Americans go to Taylor Swift concerts and movies, e.g. Barbie and Oppenheimer The influx came this summer on the back of a strong labor market and excess savings accumulated during the pandemic. But as those savings dry up and the labor market cools under pressure from rising interest rates, Roach believes consumers will “cut back on their profligate spending.”
He also noted that business investment in equipment shrank in the third quarter, suggesting that rising interest rates “put pressure on businesses.” He explained that business rebuilding inventories added 1.3 percentage points to third-quarter GDP, a trend that was unlikely to continue “given the nature of inventory management.”
Ellen Zentner, chief U.S. economist at Morgan Stanley, backed up those comments in a note on Thursday, arguing that the data was “upbeat” in the third quarter due to inventory rebuilding. After the recession, GDP growth will slow down in the next few quarters due to “the drag of reduced inventories.” Her team is currently tracking fourth-quarter GDP at just 0.7%.
“With the cumulative effect of tighter monetary policy and tighter financial conditions, we expect economic growth to slow significantly by the end of the year,” Zentner wrote.
The outlook is bearish
EY chief economist Gregory Daco also worries that the good times won’t last after a strong third-quarter GDP report.
“While these signs of economic strength will fuel speculation that the economy is re-accelerating, we do not expect this strength to persist,” he said on Thursday. “Cost fatigue will be felt more broadly by consumers and businesses, Debt servicing costs are rising and job growth is slowing.”
However, not all experts are pessimistic. Jamie Cox, managing partner at Harris Financial Group, said the third-quarter GDP report showed that rising interest rates may not be as fatal to the economy or stock market as previously thought.
“Investors believe that ZIRP (zero interest rate policy) is the only condition that allows the economy to grow, which is obviously a wrong assumption,” he said. “So far, U.S. interest rates have achieved their goal of containing inflation, but not at the expense of economic growth or jobs.”
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