Hot GDP Print Does Not Mean US Economy is Out of the Woods
The US economy recently experienced its fastest growth in nearly two years, with consumers increasing their spending despite high interest rates. However, economists caution against assuming that this surge in activity signals a reacceleration of the economy.
Oxford Economics lead US economist Michael Pearce wrote, “The 4.9% annualized jump in GDP in the third quarter, along with strong monthly data through September, indicates that a recession before year-end is now unlikely based on our baseline scenario. However, much of this strength was driven by a sharp decrease in the saving rate, a significant increase in government spending, and a temporary increase in inventory accumulation.”
Pearce further warned, “There are also indications that monetary tightening is negatively impacting investment spending. Combined with ongoing financial conditions tightening, we anticipate a sharp downturn in the coming quarter, particularly in the first half of 2024.”
EY Chief Economist Gregory Daco concurred, stating in a recent note, “While these indications of economic strength may lead to speculation of a reaccelerating economy, we do not anticipate this level of momentum to be sustainable.”
Daco added, “The recent rapid tightening of financial conditions caused by surging bond yields presents a significant obstacle to business investment and consumer spending. In addition, tighter credit conditions, the resumption of student loan payments, uncertainty surrounding the delayed impact of monetary policy, and a fragile global economic environment all contribute to the expectation of below-trend real GDP growth for multiple quarters. We predict muted growth of 1.4% in 2024 following expected growth of 2.4% in 2023.”
The Federal Reserve will carefully consider this data ahead of its upcoming policy meeting next week.
Raymond James’ Chief Economist Eugenio Aleman remarked, “While this news isn’t favorable for the Federal Reserve, the continuing disinflationary trend on a year-over-year basis may alleviate some pressure.”
