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The U.S. economy likely grew rapidly in the third quarter as spending – by families, businesses and the government – increased despite rapidly rising borrowing costs.
New government data released Thursday by the Bureau of Economic Analysis is expected to show gross domestic product grew more than 4 percent between July and September, capping five straight quarters of growth and avoiding a long-feared recession became.
The economy’s resilience is the result of a strong labor market and additional savings due to the pandemic, which have allowed people to continue spending despite inflation and rising interest rates. High government hiring – including 214,000 new jobs between July and September – also contributed to overall strength.
“It’s enough to knock me over with a feather,” said Diane Swonk, chief economist at KPMG. “We have seen the most aggressive credit tightening by the Federal Reserve since the 1980s and the economy is accelerating. We really underestimated how much consumers could continue to spend.”
Americans, especially wealthy ones, still spend a lot
It’s still unclear whether higher borrowing costs could wipe out some of those gains in the coming months. Economists speak of an acceleration Economic growth is expected to slow later this year as pandemic-era savings dry up and millions of households resume student loan payments. Fears of a government shutdown, ongoing strikes by actors and autoworkers, and intensifying wars in Ukraine and Gaza are also contributing to uncertainty.
“The U.S. consumer has held up so strong and pushed the economy forward, but I expect much slower growth for the rest of the year,” said Mark Zandi, chief economist at Moody’s Analytics, who expects economic growth to slow to an annual rate of 1 percent in the fourth quarter. “There’s a lot of headwinds out there.”
In Cincinnati, Dominique Walker just made her first student loan payment in more than three years — which means she’s rethinking all sorts of other expenses, including manicures, massages and morning coffee. She packs a lot more lunch and expects to spend less this holiday season than before.
“I need to rebalance things,” said Walker, 32, a data management specialist at a hospital. “That extra $305 a month has to come from somewhere.”
The Fed has raised borrowing costs 11 times since March 2022, aiming to slow the economy enough to stabilize prices. Mortgage rates are at 7.6 percent, their highest in two decades, and the real estate market has all but stalled. But economists say this has given Americans the opportunity to spend money elsewhere. Spending at restaurants, movie theaters and sporting events have all increased in recent months, helping keep hiring in those industries.
Meanwhile, inflation has moderated – to 3.7 percent from last summer’s peak of 9.1 percent – although it is still far higher than the Fed would like.
The wave of growth is welcome news for the White House, which has invested heavily in infrastructure as part of its “Bidenomics” plan. But despite spending $302 billion, she is having a hard time convincing voters that her economic policies are working for her. Biden’s ratings on economic issues are at an all-time low. In a recent CNBC poll, only 32 percent of Americans said they approved of the president’s handling of the economy.
However, the richest Americans still have plenty of cash. Zandi estimates that U.S. households are still sitting on $1.7 trillion in additional savings from the pandemic, with the top 20 percent accounting for more than half of that balance.
This allows many families to continue spending on luxuries like travel and entertainment. Americans spent billions this summer to see Beyoncé and Taylor Swift in concert and “Barbie” on the big screen. Travel also increased: A record 33 percent of U.S. households said they planned to take a vacation this summer, according to a Federal Reserve survey.
At Lily Pond Luxury, bookings for upscale vacations are up 40 percent so far this year. Demand has been so great that owner McLean Robbins, who ran a one-woman shop before the pandemic, now has a team of 12 employees.
“We’re seeing huge expenses,” she said. “It’s about big groups, big suites, big expenses – I’m talking six figures just on Taylor Swift tickets or a trip to Antarctica.”
Even so, Customers have recently been hesitant to book in advance – not for financial reasons, but because they are worried about the geopolitical situation. The escalating war between Israel and Gaza and general geopolitical unrest are deterring some from imposing new vacations.
“We see hesitation even among our most intrepid travelers,” she said. “They say, ‘I don’t know, maybe we should rethink Morocco.’ There are too many bad things happening in the world.’”