By Peter Bergman (MoneyAmped.com)
The United States economy experienced a significant expansion, with a notable annual growth rate of 4.9% during the period spanning from July to September. Despite elevated prices, increasing interest rates, and prevailing predictions of an impending recession, American consumers exhibited resilience by maintaining a vigorous level of expenditure.
The economy saw a significant expansion in the previous quarter, more than twice as fast as in the quarter before that, according to the Commerce Department. This expansion represents the most rapid economic growth witnessed over two years.
The report released on Thursday regarding the nation’s Gross Domestic Product (GDP) indicates that the acceleration observed can be attributed to consumer behavior, specifically an increase in expenditure across various sectors such as automotive and dining establishments.
Despite the adverse impact of the recent inflationary trends on public sentiment towards the economy, many individuals have demonstrated a continued willingness to allocate discretionary funds towards indulging in leisure activities such as vacations, concert attendance, and sporting events.
The previous quarter’s notable growth, however, may represent the apex of economic performance before an imminent deceleration that is expected to commence in the ongoing October-December quarter and persist throughout 2024.
It is anticipated that the rapid pace will diminish as elevated long-term borrowing rates, in conjunction with the Federal Reserve’s short-term rate increases, mitigate expenditure by both businesses and consumers.
Rapid Expansion Was Accompanied With Increased Spending
The growth figures for the third quarter indicate an increase in spending by federal, state, and local governments, as well as a buildup of goods in warehouses and on shelves by businesses, contributing to the overall growth trajectory.
The economy’s acceleration was observed despite the Federal Reserve’s diligent endeavors to curtail growth and mitigate inflation by implementing a raised benchmark short-term interest rate, reaching approximately 5.4%. This rate stands as the highest recorded level in the past 22 years.
In recent speeches, several Federal Reserve officials acknowledged that the latest economic data has revealed a more pronounced acceleration in growth than initially anticipated. However, it is worth noting that most policymakers have indicated their inclination to maintain the current key rate, which holds significant influence over various consumer and business loans, without any alterations during their upcoming meeting.
Various contributing factors are facilitating the augmentation of consumer spending, which constitutes the predominant portion of the economy’s expansion. Despite the prevailing economic challenges faced by a significant amount of the American population due to prolonged inflationary pressures over the past two years, there is a glimmer of hope emerging.
Recent data suggests that average wages are beginning to surpass the rate of price increases, thereby bolstering individuals’ purchasing power and enabling them to engage in more substantial economic activity.
According to the Labor Department, the data available for the April-June quarter indicates a 1.7% increase in wages and salaries after accounting for inflation. The observed quarterly increase represents the most rapid growth experienced within the past three years.
According to a recent Federal Reserve report, the financial health of the American population as a whole was in a good place at the start of the year. The aggregate value of assets owned by an average household experienced a notable increase of 37% during the period spanning from 2019 to 2022. Residential property values experienced an impressive upward trajectory, while the stock market witnessed a substantial surge, marking a historical milestone based on data over three decades.
At the same time, households benefited from the meager interest rates that persisted from the pandemic-induced recession in 2020 until the latter part of the previous year. The average home, positioned equidistantly between the highest and lowest income brackets, allocated 13.4% of its earnings towards servicing interest payments on debts, marking the lowest recorded percentage in this regard.
Problems With the Economy
However, consumers are exhibiting a propensity to curtail their expenditures during the concluding quarter of the year, while the lackluster performance of the housing market continues to exert a detrimental impact on the overall economy. In the current month, a substantial number of approximately 30 million individuals have commenced the process of fulfilling their financial obligations by making monthly repayments towards their student loans, amounting to several hundred dollars.
This development can impede their capacity to engage in discretionary expenditures. The loan repayments were temporarily halted upon the onset of the pandemic three years prior.
The economy is confronted with additional challenges, notably the potential occurrence of a government shutdown in the upcoming month and a notable increase in longer-term interest rates since July. The current 30-year mortgage rate is nearing 8%, marking a significant increase and reaching a peak not seen in the past 23 years. Consequently, many individuals residing in the United States need help purchasing homes.
During a recent discourse, Federal Reserve Chair Jerome Powell expressed his overall contentment with the trajectory of the economy. The annual inflation rate has experienced a deceleration, declining from its peak of 9.1% in June 2022 to a current level of 3.7%. Simultaneously, the consistent expansion and recruitment efforts have effectively mitigated the anticipated recession, which had been extensively forecasted towards the conclusion of the previous year.
If the above trends continue, the Federal Reserve might be able to achieve the highly sought-after “soft landing” scenario. In this case, it effectively lowers inflation to its target rate of 2% without causing a severe economic downturn.
Simultaneously, Powell has duly acknowledged that in the event of continued robust economic expansion, the Federal Reserve may find it necessary to implement additional rate increases. The current benchmark short-term rate is approximately 5.4%, a peak not observed in the past 22 years.
All Eyes Are on the Next News About Interest Rates
Federal officials expressed surprise at the significant increase in retail sales, as indicated by the recent government report. The data revealed a substantial surge in consumer spending at various establishments, surpassing initial projections.
Expenditure patterns among Americans have exhibited an increase in spending across multiple categories, encompassing both essential commodities like fuel and groceries, as well as non-essential items like automobiles and dining out. The latter category, often subject to reduction during periods of economic uncertainty, has also witnessed a notable surge in consumer outlays.
The prevailing condition of elevated mortgage rates has exerted a dampening effect on the transactional activity of pre-owned residential properties. However, it is noteworthy that many property owners continue to benefit from the advantageous circumstance of securing mortgage loans at historically low interest rates, which are firmly set for three decades.
Consequently, these homeowners can sustain a relatively modest financial burden associated with their housing expenditures, notwithstanding the Federal Reserve’s implementation of interest rate increases. There is a difference because homeowners in Europe and other parts of the world have different mortgage preferences. European homeowners are more likely to choose floating-rate mortgages. According to online brokerage Redfin, approximately 80% of homeowners in the United States possess a mortgage rate that falls below 5%.
Given the prevailing trend of inflationary pressures subsiding, it is widely anticipated that the Federal Reserve will maintain its current short-term interest rate during its meeting. There is a growing consensus among economists that the policymakers of the central bank are likely to keep the current interest rates during their upcoming meeting in December.
Chairman Powell is scheduled for a news conference on Wednesday, subject to meticulous examination to discern any indications about the Federal Reserve’s forthcoming actions.
