In a recent report by the Commerce Department, the US economy experienced a substantial surge, expanding at a robust 4.9% annual rate from July to September. This growth comes in stark contrast to concerns over rising interest rates, inflation, and predictions of an impending recession. The 4.9% growth rate is the fastest in nearly two years, more than double the previous quarter’s rate of 2.1%.
However, this robust growth may be short-lived as the current October-December quarter and 2024 may witness a gradual slowdown. The contributing factors to this slowdown are the increase in long-term borrowing rates, alongside the Federal Reserve’s short-term rate hikes, which are likely to cool down both business and consumer spending. Economists anticipate that growth could drop to as low as 1.5% in the final three months of this year.
Signs of an impending slowdown include a 3.8% decline in business spending on new machinery and equipment in the last quarter, which can be attributed to the higher cost of borrowing. Factors that drove growth in the July-September period, such as a surge in stockpiled goods in businesses’ inventories, may not be repeated. The increase in house and apartment construction, boosted by lower mortgage rates, is expected to weaken the overall economy in the coming months as mortgage rates near 8% and existing home sales decline.
Consumers, in particular, have been dipping into their savings, which could eventually impact growth. The increase in credit card usage, especially among lower- and middle-income Americans, due to the Fed’s benchmark interest rate reaching about 5.4%, poses a concern. The national savings rate dropped to 3.8% of income last quarter, down from 5.2% in the previous quarter.
Inflation has been on a steady decline, with core inflation, excluding food and gas prices, slowing to a 2.4% annual rate in the third quarter. The economy’s continued growth is encouraging, with signs of a “soft landing” in which the Fed manages to reduce inflation to its 2% target without causing a recession. Still, there are uncertainties, as last week’s strong government report on retail sales showed increased spending at stores and restaurants, leading to the possibility of further rate hikes by the Federal Reserve, whose short-term rate currently stands at about 5.4%, the highest in 22 years.