The U.S. economy grew by an annual rate of 4.9 percent in the third quarter, the strongest pace since 2021, as spending — by families, businesses, and the government — accelerated, even in the face of fast-rising borrowing costs.
The economy’s resilience is a product of a strong job market and extra pandemic savings, which have made it possible for people to keep spending despite inflation and rising interest rates. Robust government hiring — including 214,000 new jobs between July and September — also added to overall strength.
“It’s enough to knock me over with a feather,” said Diane Swonk, chief economist at KPMG. “We’ve had the most aggressive credit tightening from the Federal Reserve since the 1980s and, guess what, the economy’s accelerating. We really underestimated how much consumers could keep spending.”
What isn’t clear yet is whether higher borrowing costs could reverse some of these gains in the months to come. Economists say that acceleration in economic growth is likely to slow later this year, as pandemic-era savings dry up and millions of households resume student loan payments. Fears of a government shutdown, ongoing strikes by actors and autoworkers, and worsening wars in Ukraine and Gaza are also adding to the uncertainty.
“The U.S. consumer has so been hanging tough and powering the economy forward, but I expect much slower growth the rest of the year,” said Mark Zandi, chief economist at Moody’s Analytics, who expects economic growth to slow to an annualized rate of 1 percent in the fourth quarter. “There are a lot of headwinds out there.”
In Cincinnati, Dominique Walker just made her first student loan payment in more than three years — which means she’s rethinking all sorts of other expenses, including manicures, massages, and morning coffees. She’s packing her lunch a lot more and expects to spend less this holiday season than she has been.
“I’m having to rebalance things,” said Walker, 32, a data management specialist at a hospital. “That extra $305 a month, that has to come from somewhere.”
The Fed has lifted borrowing costs 11 times since March 2022, with the goal of slowing the economy enough to stabilize prices. Mortgage rates, at 7.6 percent, are at a two-decade high, and the housing market has all but come to a standstill. But economists say that has freed up Americans to spend elsewhere. Expenditures at restaurants, movie theaters and sporting events have all risen in the past few months, helping support continued hiring in those industries.
Meanwhile, inflation has moderated — to 3.7 percent from last summer’s peak of 9.1 percent — though it remains far higher than the Fed would like.
The spate of growth is welcome news for the White House, which has invested heavily in infrastructure as part of its “Bidenomics” plan. But despite $302 billion in spending, it has struggled to convince voters that its economic policies are working for them. Biden’s ratings on economic matters are lower than ever, with just 32 percent of Americans saying they approve of the president’s handling of the economy in a recent CNBC poll.
The wealthiest Americans, though, remain flush with cash. Zandi estimates U.S. households are still sitting on $1.7 trillion in extra pandemic savings, with the top 20 percent accounting for more than half of that balance.
That’s allowed many families to keep shelling out on luxuries such as travel and entertainment. Americans spent billions this summer to see Beyoncé and Taylor Swift in concert, and “Barbie” on the big screen. Travel picked up, too: A record 33 percent of U.S. households said they took a vacation this summer, according to a survey by the Federal Reserve.
At Lily Pond Luxury, bookings for upscale vacations are up 40 percent so far this year. Demand has been so brisk that owner McLean Robbins, who ran a one-woman shop before the pandemic, now has a team of 12.
“We’re seeing massive spending,” she said. “It’s all about big groups, big suites, big spending — I’m talking six figures just for Taylor Swift tickets or a trip to Antarctica.”
Even so, customers have been reluctant to book ahead lately — not for financial reasons, but because they’re worried about the state of geopolitical affairs. The escalating war between Israel and Gaza and general geopolitical unrest is keeping some from locking down new vacations.
“We’re seeing hesitation even in our most intrepid travelers,” she said. “They’re saying, ‘I don’t know, maybe we should rethink Morocco. There are too many bad things happening in the world.’”
The European Central Bank left interest rates unchanged for the first time in more than a year as it gauges whether an unprecedented series of hikes will succeed in subduing inflation.
Following last month’s knife-edge decision to lift the deposit rate to a record 4%, policymakers kept it there on Thursday — matching the predictions of all economists surveyed by Bloomberg.
They reiterated in a statement that holding borrowing costs at that level for long enough will make a “substantial contribution” to bringing consumer-price gains back to the 2% target.
The euro held losses against the dollar, while German bonds edged higher.
Like its peers in the US and the UK, the ECB hasn’t shut the door to further hikes, should inflation fail to ease quickly enough. But there’s little doubt among economists and investors that the high point for euro-zone borrowing costs has been reached following 10 back-to-back moves starting in July 2022.
That’s fueling bets on when the first rate cuts will arrive, with investors buying into ECB’s “higher-for-longer” narrative by pricing reductions from next fall — even as the region is at risk of finally succumbing to a recession.
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Officials aren’t offering many clues, focusing instead on other policy levers — primarily, the €1.7 trillion ($1.8 trillion) pandemic bond portfolio, known as PEPP.
Winding down PEPP more quickly than currently planned would bolster monetary tightening and accelerate a wider exit from crisis-era stimulus. But such a move may prove controversial as Middle East tensions threaten to push oil prices higher, Italy’s government finances worry investors and the euro area’s economy sputters.
The Governing Council said that the incoming data have “broadly confirmed” its previous assessment of the medium-term price outlook. “Inflation is still expected to stay too high for too long, and domestic price pressures remain strong,” it said.
President Christine Lagarde will explain the decision at a news conference at 3:45 p.m. in Athens, where the Governing Council gathered for one of its regular meetings beyond its Frankfurt headquarters.
The ECB’s announcement is part of a slew of global rate meetings. On Wednesday, the Bank of Canada kept rates unchanged for a second straight time, while leaving open the possibility of more tightening. Next week will feature decisions by the Federal Reserve and the Bank of England. Both are expected to hold fire.
Since their last policy gathering in September, ECB officials have seen inflation slow more than anticipated. It could abate to a two-year low of about 3% this month, according to a Bloomberg Economics estimate.
But while the surge in rates is benefiting lenders like Deutsche Bank, third-quarter gross domestic product numbers for the 20-nation eurozone, due next week, are likely to show meager growth at best. Surveys of purchasing managers for October signaled that both the manufacturing and services sectors are mired in downturns.
Germany, the currency bloc’s largest economy, is also its biggest concern as it faces the prospect of a second recession in just over a year. ECB policymakers will have to wait until December for fresh staff projections that will look all the way into 2026.
BREAKING: U.S. GDP rose at a 4.9% annualized pace in the July-through-September period, up from the 2.1% pace in the second quarter. @steveliesman has the numbers. https://t.co/qwITMNJ6rj pic.twitter.com/4wIiM03I54
— CNBC (@CNBC) October 26, 2023