Despite the recent surge in GDP growth in the US, economists warn that this does not necessarily indicate a reacceleration of the economy. Factors such as a fall in the saving rate, government spending, and inventory accumulation are not sustainable, and there are signs that monetary tightening is impacting investment spending. As a result, economists predict a sharp downturn in the coming quarters.
US Economy Shows Strong Growth, But Experts Remain Cautious
The US economy experienced its fastest pace of growth in nearly two years during the past three months, with consumers increasing their spending despite a high interest rate environment. However, economists are cautioning that this surge in activity does not necessarily mean that the economy is reaccelerating.
Oxford Economics lead US economist Michael Pearce highlights that the 4.9% annualized jump in GDP in the third quarter and the strength of the monthly data through September make it unlikely for a recession to begin before the end of the year. However, he points out that much of this growth was driven by a sharp fall in the saving rate, a rise in government spending, and a jump in inventory accumulation, all of which are not sustainable in the long run.
Furthermore, there are signs that monetary tightening is weighing on investment spending. Financial conditions are still tightening, and economists expect a sharp downturn in the coming quarter, with the bulk of the weakness likely to show up in the first half of 2024.
EY chief economist Gregory Daco shares a similar view, stating that while the signs of economic strength may fuel speculations of a reaccelerating economy, he does not expect such strong momentum to be sustained. Daco highlights that the recent rapid tightening of financial conditions, driven by surging bond yields, is a significant headwind for business investment and consumer spending. Coupled with tighter credit conditions, the restart of student loan payments, the impact of monetary policy, and a fragile global economic backdrop, real GDP growth is expected to drift below trend for several quarters. Daco forecasts a muted 1.4% growth in real GDP in 2024, following an expected growth of 2.4% in 2023.
The upcoming Federal Reserve policy meeting will consider the GDP figure, and while this news may not be positive for the Federal Reserve, Raymond James’ chief economist Eugenio Aleman suggests that the disinflationary process continuing on a year-earlier basis could alleviate some pressure.
While the recent GDP growth in the US is impressive, economists are urging caution and highlighting the unsustainable nature of certain factors contributing to this growth. The tightening of financial conditions and other challenges could result in a sharp downturn in the coming quarters, indicating that the economy may not be out of the woods just yet.