Despite the recent surge in US economic growth, economists are cautious about the sustainability of this momentum. Factors such as a fall in the saving rate, increased government spending, and inventory accumulation are not expected to be sustained. There are also signs that monetary tightening is impacting investment spending. As a result, economists predict a sharp downturn in the coming quarters, particularly in the first half of 2024.
H2 US Economic Growth Raises Concerns About Sustainability
In recent months, the US economy has experienced a significant jump in growth, with GDP expanding at its fastest pace in nearly two years. This growth has been driven by increased consumer spending, despite a high interest rate environment. However, economists are cautioning against assuming that this surge in activity indicates a reacceleration of the economy.
According to Oxford Economics lead US economist Michael Pearce, while the 4.9% annualized jump in GDP in the third quarter and strong monthly data suggest that a recession is unlikely to begin before the end of the year, much of this strength is not sustainable. Factors such as a sharp fall in the saving rate, a rise in government spending, and a jump in inventory accumulation have contributed to the growth but are not expected to continue in the long term.
Furthermore, there are indications that monetary tightening is having a negative impact on investment spending. Financial conditions are still tightening, and economists anticipate a sharp downturn in the coming quarters, particularly in the first half of 2024.
EY Chief Economist Gregory Daco shares this sentiment, stating that while signs of economic strength may fuel speculations of reacceleration, strong momentum is unlikely to be sustained. The recent tightening of financial conditions, spurred by surging bond yields, poses a significant headwind for business investment and consumer spending. Tighter credit conditions, the restart of student loan payments, uncertainty regarding the lagged impact of monetary policy, and a fragile global economic backdrop further contribute to the prediction of below-trend real GDP growth for several quarters.
These concerns about the sustainability of economic growth will be carefully considered by the Federal Reserve ahead of its upcoming policy meeting next week. While the data may not be good news for the Federal Reserve, the fact that the disinflationary process has continued on a year-earlier basis could alleviate some pressure. Raymond James’ Chief Economist Eugenio Aleman highlights the importance of this factor.
In conclusion, while the recent surge in US economic growth is noteworthy, economists are urging caution and emphasizing that this momentum may not be sustained. Various factors, including unsustainable elements contributing to the growth and tightening financial conditions, are expected to lead to a sharp downturn in the coming quarters. The Federal Reserve will closely examine this data as it makes decisions regarding its policies.