Hot GDP data doesn’t mean the US economy is out of the woods
The U.S. economy grew at its fastest pace in nearly two years in the last three months as consumers increased spending despite a high interest rate environment.
But economists say the increase in activity doesn’t necessarily mean the economy is accelerating again.
“The 4.9% annualized GDP increase in the third quarter and the strength of monthly data through September mean that a recession is now unlikely to begin before the end of the year, as we suggested in our base case,” wrote Michael Pearce, senior U.S. economist at Oxford Economics. “However, much of this strength was due to a sharp decline in the savings rate, a sharp increase in government spending and a jump in inventories, all of which will not last.”
“There are also signs that monetary tightening is weighing on capital spending, and as financial conditions continue to tighten, we still expect a sharp downturn in the coming quarter,” the economist warned, adding that the bulk of this Weakness will likely show in the first half of 2024.
EY chief economist Gregory Daco agreed, writing in a note on Thursday: “While these signs of economic strength will fuel speculation that the economy will accelerate again, we do not expect this strong momentum to continue.”
The analyst added: “The recent rapid tightening of financial conditions, driven by rising bond yields, represents a significant headwind to business investment and consumer spending.” Combined with “tighter credit conditions, the resumption of student loan payments, certainty about the delayed impact of the Monetary policy and a fragile global economic environment, real GDP growth is likely to remain below trend for several quarters. We expect real GDP to grow by a muted 1.4% in 2024, following expected growth of 2.4% in 2023.”
The GDP figure will be among the data the Federal Reserve will consider at its policy meeting next week.
“Although this is not good news for the Federal Reserve, the fact that the disinflationary process has continued on a year-on-year basis may relieve some pressure,” wrote Eugenio Aleman, chief economist at Raymond James.