2023-10-28 20:02:13
The US Federal Reserve’s 18-month interest rate hikes were supposed to calm the momentum of the world’s largest economy, but consumers had a different opinion. Last Thursday, federal data showed that the US economy grew at an annual rate of 4.9% in the third quarter of this year, which is a very rapid pace that challenged the gloomy expectations of economists, and not for the first time.
Kathy Bostiancic, chief economist at Nationwide, described it as “an exercise in humility,” referring to the poor track record of forecasts since the pandemic.
What made the most robust GDP data since 2021 so surprising was the decisions that preceded it. They were the most stringent decisions by the Federal Reserve towards monetary policy in decades. The central bank has raised interest rates 11 successive times since March last year, reaching their highest levels in 22 years, ranging between 5.25 and 5.5%, in an attempt to calm the economy and reduce inflation. Inflation has indeed eased, but the economy has been far from calm or subdued this summer.
However, although they have been less precise in recent months, economists have warned that US GDP will not defy gravity for much longer.
The US economy’s astonishing resilience so far stems from one main source: consumer spending, which was by far the largest contributor to the third-quarter economic boom, accounting for more than half of the annual increase. Supported by a healthier labor market, Americans have the confidence to continue purchasing thanks to continued demand for labor.
“The job growth has been really amazing, which has given a huge boost to consumer spending,” Bostiancic said. Moreover, what “catalyzed” this strong dynamic was the feeling among consumers that they enjoyed great liquidity.
She added, “Balance sheets appear to be in good shape, and stocks have enjoyed a very good performance in general, with house prices rising sharply, and even if you do not have assets, there is an outcome of savings related to the period of the pandemic.”
But she, like other economists and policy makers, expects this momentum to fade, especially with the impact of previous interest increases by the Federal Reserve extending, and companies and households being exposed to the brunt of rising borrowing costs, following government bond yields doubled, reaching their highest levels.
The signs are clear that consumer power is waning.
Economists estimate that a large amount of additional savings accumulated since the pandemic, amounting to more than two trillion dollars, has been exhausted. Moreover, Nancy Vanden Houten, chief economist at Oxford Economics, believes that what remains is concentrated among the wealthiest families, noting that companies have become more cautious.
Gregory Daco, chief economist at EY Parthenon, believes that the US economic engine that witnessed a very strong performance in the third quarter is regarding to fade away.
He explained: “All the positive drivers of consumer spending were accelerating very strongly over the summer, but we saw a significant decline in some of these drivers, and we expect others to decline in the coming months.”
“If companies start to feel the pressures of rising debt service costs and lower workforce utilization, and if they start to feel the need to cut costs because they won’t necessarily be able to generate the revenue they’re targeting, that will start to have a ballpark effect,” Daco added. the snow”.
Daco said signs of “cost heaviness” were evident in the latest GDP data, as non-resident fixed investment, which measures companies’ spending on machinery and other equipment, fell by 0.1% on a quarterly basis. This is the third decline in this category in the last four quarters, which is an indication of “the impact of higher interest rates on corporate activity,” according to economists at Morgan Stanley.
Forecasts compiled by Bloomberg indicate that most economists currently expect US GDP growth to decline to 0.8 in the next quarter, more than 4 percentage points lower than the reading recorded in the third quarter, before falling to the bottom at 0.2%. During the first three months of 2024. Ian Shepherdson, chief economist at Pantheon Economics, believes that growth may fall to zero in the next quarter, but he admitted that there is a large margin for error. However, whether or not the US economy has fallen into recession remains a matter of great controversy.
US Treasury Secretary Janet Yellen said on Thursday that the data did not indicate “any signs of recession,” although she acknowledged that the pace of growth of the past quarter would likely not be repeated. Jerome Powell, Chairman of the Federal Reserve, in turn stressed that there is still room for the economy to witness a smooth decline. Daco believes that the chances of a recession in the economy next year are equal, but he was cautious regarding the forecast. “We’ve learned to be very modest in our ability to predict,” Daco said.
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