The government is expected to report stellar growth
for the US economy during the July-September quarter, highlighting the
durability of consumer and business spending despite the Federal Reserve’s
efforts to cool the expansion with high interest rates.
Last quarter’s robust growth, though, will probably
prove to be a high-water mark for the economy before a steady slowdown
beginning in the current October-December quarter and extending into 2024.
Thursday’s report is sure to be seized upon by the
Biden administration as evidence that its policies have helped spur solid
growth, though surveys show that most Americans hold a sour view of the
president’s handling of the economy.
The Commerce Department’s figures are expected to show
that the nation’s gross domestic product the economy’s total output of goods
and services expanded at a 3.8 per cent annual pace in the third quarter,
according to a survey of economists by FactSet.
If accurate, that would amount to the fastest
quarterly pace in nearly two years and up sharply from a 2.1 per cent growth
rate in the April-June quarter. Some economists have estimated that last
quarter’s annual growth could turn out to be as high as 4.5 per cent.
Americans likely drove the economy by stepping up
their spending, splurging on everything from cars to concert tickets to
restaurant meals. Businesses have also been spending on new factories and other
buildings, and companies likely increased their stockpiles of goods, which
boosts output.
Still, the breakneck pace is expected to slow because
consumers are likely reining in their spending in the final three months of the
year, and the sluggish housing market is dragging on the economy.
This month, nearly 30 million people began repaying
several hundred dollars a month in student loans, which could slow their
ability to spend. Those loan repayments had been suspended since the pandemic
first struck three years ago.
The economy faces other challenges as well, including
a spike in longer-term interest rates since July. The average 30-year mortgage
rate is approaching 8 per cent, a 23-year high, putting home buying out of
reach for many more Americans.
Fed officials have acknowledged the pickup in growth,
which could potentially undercut their efforts to fight inflation. Brisk
consumer spending typically leads companies those that sell physical goods as
well as those, like restaurants and entertainment venues, in the economy’s vast
service sector to raise prices, thereby fueling inflation.
But Fed Chair Jerome Powell, in a discussion last
week, said he was generally pleased with how the economy was evolving:
Inflation has slowed to an annual rate of 3.7 per cent from a four-decade high
of 9.1% in June 2022. At the same time, steady growth and hiring have
forestalled the recession that was widely predicted at the end of last year.
If those trends continue, it could allow the Fed to
achieve a highly sought-after “soft landing,” in which the central bank would
manage to slow inflation to its 2 per cent target without causing a deep
recession.
At the same time, Powell has acknowledged that if the
economy were to keep growing robustly, the Fed might have to raise rates
further. Its benchmark short-term rate, which affects the rates on many
consumer and business loans, is now about 5.4 per cent, a 22-year high.
“Additional evidence of persistently above-trend
growth,” Powell said last week, “could put further progress on inflation at
risk and could warrant further tightening of monetary policy.”
Fed officials were surprised by a blowout government
report last week on retail sales, which showed that spending at stores and
restaurants jumped last month by much more than expected.
Americans spent more both for necessities like gas and
groceries as well as for discretionary items, such as cars and restaurant
meals, on which consumers typically cut back if they are worried about a
weakening economy.
There are signs that consumers might continue to
resist the Fed’s efforts to cool spending and the economy. Many student loan
borrowers started repaying their loans before the official end of the
moratorium Oct. 1, suggesting that they were able to make those payments, at
least for now, without having to sharply cut back spending in other areas.
“We view this initial jump as a sign that households
were willing and able to resume these payments without requiring a large
reduction in spending,” economists at JPMorgan write in a research note.
And while high mortgage rates have depressed the sales
of existing homes, the vast majority of homeowners are still paying low rates
that are fixed for 30 years, meaning that their housing costs remain low even
as the Fed hikes rates.
That’s a contrast to homeowners in the United Kingdom
and Europe, for example, who are more likely to have floating-rate mortgages.
About eight in 10 U.S. homeowners have a mortgage rate below 5 per cent,
according to online brokerage Redfin.
With inflation generally easing, the Fed is expected
to keep its short-term rate unchanged when it meets next week. Many economists
increasingly expect the central bank’s policymakers to keep rates on hold when
they meet in December as well.
Powell will hold a news conference Wednesday that will
be scrutinized for any hints about the Fed’s next moves.
PTI
