U.S. Economy Booms at 4.9% Rate Despite Fed Rate Hikes

The U.S. economy expanded at a robust 4.9% annual rate from July through September, defying higher prices, rising interest rates, and forecasts of a recession. The Commerce Department reported that this growth rate was the fastest in nearly two years, more than twice the previous quarter’s rate of 2.1%.

Consumer spending was the driving force behind this acceleration, with Americans splurging on a wide range of goods and services, including cars, restaurant meals, vacations, concert tickets, and sports events. Despite inflation concerns, many people’s willingness to spend remained strong.

However, experts predict that the upbeat growth in the last quarter may mark a high point for the economy. They expect a gradual slowdown in the current October-December quarter and into 2024 due to higher borrowing rates and the Federal Reserve’s short-term rate hikes, which are likely to cool down spending by businesses and consumers.

The growth figures for the third quarter also showed increased spending by federal, state, and local governments, as well as a buildup of business inventories. However, economists do not anticipate a repeat of this inventory boost in the coming months.

Surprisingly, the economy managed to accelerate last quarter despite the Federal Reserve’s efforts to slow growth and inflation by raising its benchmark short-term interest rate to its highest level in 22 years (about 5.4%). While some Fed officials were taken aback by the stronger-than-expected growth, they are expected to maintain the current interest rate in their upcoming meeting.

Factors supporting consumer spending include rising wages and salaries that outpace price increases, as well as healthy financial circumstances for many households. The net worth of a typical household has increased by 37% from 2019 to 2022, and the proportion of income used to cover interest on debts is at its lowest level on record.

Despite these positive factors, consumer spending is likely to decrease in the final months of the year due to loan repayment obligations and a sluggish housing market. Additionally, the economy faces challenges such as the possibility of a government shutdown and a spike in longer-term interest rates, making home buying less affordable for many Americans.

Fed Chair Jerome Powell expressed general satisfaction with the economy’s progress, noting a decline in inflation and steady growth. If these trends continue, it could lead to a desirable “soft landing” for the Fed, where inflation is controlled without triggering a recession. However, the recent strong government report on retail sales has surprised Fed officials, and if robust economic growth persists, the Fed may consider further rate hikes.

With inflation gradually easing, the Fed is expected to keep its short-term rate unchanged in its upcoming meeting. Many economists also predict that rates will remain on hold in December. Fed Chair Jerome Powell’s news conference on Wednesday will be closely watched for any indications of the Fed’s future actions.