The U.S. economy experienced robust growth in the three-month period ending in September, surpassing expectations and dispelling concerns of a recession. This strong performance, however, complicates efforts to address inflation.
On Thursday, fresh GDP data was released, exceeding economist expectations and further reinforcing signs of a resilient economy that is resisting the Federal Reserve’s attempts to slow down price increases. Earlier this month, a blockbuster jobs report also surpassed economist expectations by nearly twofold. Additionally, consumer spending, which accounts for a significant portion of U.S. economic activity, surged in September, as indicated by data released last week.
This period saw U.S. GDP grow at an annualized rate of 4.9%, significantly higher than the 2.1% annualized rate of the previous quarter. The surge can largely be attributed to increased consumer spending, as reported by the Bureau of Economic Analysis (BEA).
The BEA stated that consumers spent more on services like medical appointments and eating out, as well as goods such as cars and prescription drugs. Exports and government spending were also contributing factors to the GDP growth.
However, this spending spree led to a decrease in personal savings during the third quarter. The BEA reported that the share of disposable income saved dropped from 5.2% in the previous quarter to 3.8% in the three-month period ending in September.
Such strong economic performance may prompt the Federal Reserve to raise interest rates at its upcoming meeting, as it aims to tackle persistently high inflation. Fed Chair Jerome Powell acknowledged the unexpectedly robust economic growth during a recent speech, expressing concern about its impact on inflation progress.
Although inflation is below its peak from last year, it remains more than a percentage point above the central bank’s target rate. Nonetheless, recent economic growth contradicts the alarm raised by another key economic indicator: the 10-year treasury yield.
In recent weeks, the rapid rise in U.S. government bond yields has increased borrowing costs for consumers and corporations. This surge in borrowing expenses could potentially slow down economic activity in the coming months, leading economists to anticipate a slowdown in GDP growth later this year.
This financial strain is evident in the housing market, with the average interest rate for a 30-year fixed mortgage reaching 8% last week, based on Mortgage News Daily data. High mortgage rates have considerably slowed down the housing market, as buyers are deterred by the high borrowing costs, and sellers choose to stay put with their existing mortgages that have comparably lower rates. Mortgage applications have reached their lowest level since 1996, as reported by the Mortgage Brokers Association earlier this month.
In a letter last week, major housing industry groups expressed “profound concern” about rising mortgage rates and urged the Federal Reserve to refrain from further rate hikes. Business leaders and policymakers eagerly await the Fed’s announcement on Nov. 1 regarding its latest rate-hike decision.
The central bank’s projections, included in a statement from the Federal Open Market Committee (FOMC) last month, suggest that they anticipate one more rate hike for the year. The current benchmark interest rate stands at a range of 5.25% to 5.5% as a result of a historically significant series of rate increases, also known as credit tightening.
“Given the rapid pace of the tightening, there may still be significant tightening ahead,” Powell remarked last week.
