The U.S. economy experienced a significant surge in growth during the third quarter of 2023, primarily driven by consumer spending on a variety of goods and services, according to reports from the Commerce Department. Despite this, an impending economic slowdown is predicted by Joseph Brusuelas, Chief Economist at RSM, from this quarter until 2024 due to higher borrowing rates and the Federal Reserve's short-term rate hikes.
Indicators of this potential slowdown include a decrease in business investment in machinery and a potential decline in housing construction due to escalating mortgage rates affecting the housing market. Consumers, however, have continued to spend, with some resorting to high-interest credit cards after the Fed's rate hike. This indicates an increased usage of credit cards among Americans.
Federal Reserve officials recognized this unexpected growth but hinted at maintaining their key rate. Sarah Wolfe, U.S. Economist at Morgan Stanley highlighted one-time factors like blockbuster concerts as contributing to this boost in spending. Fed Chair Jerome Powell expressed contentment with economic evolution and a slowing inflation rate, despite acknowledging strong retail sales data that may necessitate further rate hikes.
The resumption of student loan repayments could potentially slow consumer spending. A report from the Fed indicates the net worth of a typical household jumped 37% from 2019 through 2022 due to a surge in home prices and the stock market.
FactSet economists predict that Thursday's U.S. government report will show a "high-water mark" Q3 growth for the economy, driven by robust consumer and business spending despite the Federal Reserve's high interest rates. The Biden administration views this as an affirmation of their successful economic policies, although public sentiment remains negative towards the president's economic management.
The Commerce Department's figures are expected to show a 3.8% annual GDP expansion in Q3, the fastest quarterly pace in nearly two years, and a significant increase from a 2.1% growth rate in Q2. This growth was primarily driven by consumers spending on various goods and services, and businesses investing in new factories and other buildings.
However, this rapid pace is expected to slow due to consumers likely curbing their spending in Q4, and the sluggish housing market impacting the economy. Nearly 30 million student loan borrowers started repaying loans this month, potentially limiting their spending capacity.
The economy also faces challenges such as a spike in longer-term interest rates since July, with the average 30-year mortgage rate nearing 8%, a 23-year high, making home buying unaffordable for many Americans. Federal Reserve officials have acknowledged this growth pickup, which could undermine their efforts to fight inflation.
Federal Reserve Chair Jerome Powell expressed satisfaction with how the economy was evolving: Inflation has slowed to an annual rate of 3.7% from a four-decade high of 9.1% in June 2022. Steady growth and hiring have prevented the widely predicted recession. Powell also acknowledged that if robust economic growth continues, the Fed might have to raise rates further to achieve a "soft landing" scenario.
The benchmark short-term rate, affecting consumer and business loans, is now about 5.4%, a 22-year high. A recent blowout government retail sales report showed greater-than-expected spending at stores and restaurants last month.
Many student loan borrowers started repaying their loans before the official end of the moratorium on Oct. 1, suggesting they could make these payments without significantly cutting back other spending areas. Economists at JPMorgan noted this as a sign that households were willing and able to resume these payments without requiring a large reduction in spending.
Despite high mortgage rates depressing existing home sales, Redfin (NASDAQ:RDFN) data shows that about eight in 10 U.S. homeowners have a mortgage rate below 5%, meaning their housing costs remain low even as the Fed hikes rates. With inflation generally easing, the Fed is expected to maintain its short-term rate when it meets next week.
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