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.
What’s particularly remarkable is that the economy grew so strongly amid the highest interest rates in more than 15 years, as the Federal Reserve tries to cool the economy down to curb inflation, which has lately been easing.
“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.”
That spending was broad-based in the third quarter, with U.S. households doubling down on both necessities, such as housing, utilities and prescription drugs, as well as luxuries including dining out, hotel stays and recreation. Businesses and the federal government also continued to spend, though GDP was dragged down by lower nonresidential investments.
Overall, the latest spike in GDP is more than double the previous quarter’s annual growth rate of 2.1 percent.
What isn’t clear yet is whether higher borrowing costs could reverse some of these gains in the months to come. Economists say 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 says it’s likely economic growth will 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.”
For now, the spending surge from this summer and early fall is raising new questions about whether the Federal Reserve might have to be even more aggressive in its efforts to temper inflation.
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. Although the Fed is not expected to raise interest rates when it meets next week, some say it may have to continue tightening later this year if progress on inflation continues to stall and consumer spending remains robust.
“The Fed’s job isn’t done and it does not appear that higher interest rates are doing the job for them,” Quincy Krosby, chief global strategist for LPL Financial, wrote in a Thursday note to clients.
Economic growth has continued to soar despite higher interest rates — a combination last seen in mid-2007, right before the Great Recession, when GDP grew by 4.8 percent and the federal funds rate hovered above 5 percent. Although that bears striking similarities to today’s environment, economists caution against drawing too many parallels.
“We’re in a very different place: I don’t think we’re about to see these interest rates trigger a housing crisis that’s going to cascade through the economy,” said Erik Lundht, principal economist at the Conference Board.
But, he added, he is forecasting a mild recession in the first half of next year.
“People are seeing their savings and income erode, but they’re still spending heavily,” he said. “That can’t continue forever.”
Still, the spate of recent growth is welcome news for the White House, which has invested heavily in infrastructure as part of its “Bidenomics” plan. Economists say its clear those policies are paying off: Robust manufacturing construction and government spending drove much of last quarter’s growth, and households have continued to benefit from historic job gains.
But despite $302 billion in infrastructure spending, the Biden administration 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. Overall, median wealth among U.S. households grew by an astonishing 37 percent between 2019 and 2022, according to the Fed’s latest report on consumer finances.
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.’”