President Joe Biden is expressing confidence and celebrating a robust GDP report, hailing it as a victory while declaring that fears of an impending recession are unfounded. However, Wall Street remains cautious in its assessment of the situation.
Despite persistent inflation and rising interest rates, American consumers continued their spending spree throughout the third quarter, driving the U.S. economy to its fastest growth since late 2021.
The Bureau of Labor Statistics (BLS) released an advance estimate showing that real gross domestic product (GDP) grew at an impressive 4.9% annual rate in the last quarter. This marks a significant improvement from the 2.1% growth experienced in the previous quarter. Factors contributing to this growth include increased federal and state government spending, boosted exports, and expanded inventory investments by businesses, as explained by the BLS.
The Biden administration was quick to highlight the surge in economic growth, countering years of recession predictions from Wall Street. With inflation soaring to a four-decade high of over 9% in June 2022, many experts had warned that the Federal Reserve might have to raise interest rates aggressively to restore price stability, potentially triggering a recession. President Biden, however, rejected this notion.
In a statement, he said, “I never believed we would need a recession to bring inflation down—and today we saw again that the American economy continues to grow even as inflation has come down. It is a testament to the resilience of American consumers and American workers, supported by Bidenomics—my plan to grow the economy by growing the middle class.”
Wall Street’s Skepticism
The latest surge in GDP growth surprised many economists and Wall Street analysts who remain concerned about the impact of rising interest rates and stubborn inflation on the economy. Some even argue that the latest GDP report could be a last hurrah for a slowing economy.
Mark Hamrick, a senior economic analyst at Bankrate, advised caution, noting that the economy still faces challenges, including the Federal Reserve’s “higher for longer” interest rate policy, surging Treasury yields, and the potential for a partial federal government shutdown in November due to budget gridlock in Washington. Additionally, geopolitical instability is on the rise with conflicts like Russia-Ukraine and Israel-Hamas.
Olu Sonola, head of U.S. economics at Fitch Ratings, acknowledged the strong GDP numbers but warned that sustaining this growth would be difficult in an increasingly restrictive interest rate environment. She predicted that the Fed’s higher interest rates might persist longer than anticipated, potentially affecting economic growth.
Economists’ Cautious Outlook
Despite the strong GDP report, several economists issued warnings. Jeffrey Roach, chief economist at LPL Financial, argued that the robust consumer spending seen in the third quarter might not be sustainable in the coming quarters as consumers exhaust their savings amid rising interest rates. He also highlighted a decline in corporate investment for equipment and the unlikely continuation of inventory rebuilding, both indicators of a slowing economy.
Morgan Stanley’s chief U.S. economist, Ellen Zentner, predicted a slowdown in GDP growth in the upcoming quarters due to a “drag from inventory drawdown” after the third-quarter boost. Her team estimated fourth-quarter GDP at just 0.7%.
EY chief economist Gregory Daco expressed concerns about the long-term sustainability of economic strength, citing cost fatigue, rising debt servicing costs, and slowing job growth.
A Mixed Outlook
While many experts express caution and concerns about the economy’s future, Jamie Cox, managing partner for Harris Financial Group, offered a more optimistic perspective. He suggested that the third-quarter GDP report implies that rising interest rates may not be as detrimental to the economy or stocks as previously feared, emphasizing that the U.S. economy can grow even with higher interest rates as long as inflation is kept in check.
Please note that economic forecasts and assessments can change over time, and the situation may evolve.
