The U.S. economy grew at a rapid pace in the three months ending in September, more than doubling the previous quarter’s growth and easing worries about a possible recession. However, the robust performance makes the fight against inflation difficult.
New GDP data released Thursday, which beat economists’ expectations, underpins other recent indicators of a strong economy that is defying Federal Reserve efforts to temper price rises through a slowdown.
A blockbuster jobs report earlier this month beat economists’ expectations by almost double. Consumer spending, which accounts for nearly three-quarters of U.S. economic activity, rose sharply in September, data released last week showed.
U.S. GDP grew at an annual rate of 4.9% in the three months ended September, accelerating from an annual rate of 2.1% in the previous quarter.
The increase was due in large part to a surge in consumer spending, the Bureau of Economic Analysis, a government agency, said Thursday.
BEA said consumers increased their spending on services such as doctor’s appointments and dinners, as well as goods such as cars and prescription drugs.
Other contributors to GDP growth include exports and government spending, the agency added.
In line with the spending boom, personal savings fell in the third quarter, the BEA said. The share of disposable income put aside for savings was 3.8% in the three months to September, compared with 5.2% in the previous quarter.
Such a strong performance could prompt the Fed to raise interest rates at its meeting next week as it tries to combat persistently high inflation.
At a lunch in New York City last week, Fed Chairman Jerome Powell noted the stronger-than-expected economic performance in recent months.
“We are alert to recent data showing the resilience of economic growth and labor demand,” Powell said, adding that such growth “could threaten further progress on inflation.”
Inflation is well below its peak of over 9% last year, but progress has stalled in recent months and price growth is still more than a percentage point above the central bank’s target rate.
However, recent economic growth belies the alarm raised by one of the most important economic indicators: the 10-year Treasury yield.
A rapid rise in U.S. Treasury yields in recent weeks has increased borrowing costs for consumers seeking mortgage loans and for companies seeking funds to expand their businesses.
The rise in borrowing costs threatens to slow economic activity in the coming months. Economists expect GDP growth to slow later this year.
The start of some financial troubles can be seen in the real estate market, where the average interest rate on a 30-year fixed-rate mortgage hit 8% last week, data from Mortgage News Daily shows.
High mortgage rates have dramatically slowed the housing market as home buyers balked at high borrowing costs and home sellers opted to stick with mortgages that locked them into comparatively low interest rates.
The number of mortgage applications has fallen to its lowest level since 1996, the Mortgage Brokers Association said earlier this month.
Major housing industry groups expressed “deep concern” about rising mortgage rates in a letter last week calling on the Federal Reserve to stop raising its benchmark interest rate.
Business leaders and policymakers will be watching closely when the Fed announces its latest rate hike decision on November 1st.
The central bank expects to raise interest rates again this year. This is according to forecasts included last month along with a statement from the Federal Open Market Committee (FOMC), the Fed’s decision-making body on interest rates.
The benchmark interest rate is currently in a range of 5.25% to 5.5%, reflecting a near-historic series of interest rate hikes, also known as a credit squeeze.
“Given the rapid pace of tightening, there may still be meaningful tightening in the pipeline,” Powell said last week.