The U.S. economic growth was driven by consumer spending at a rate of 4.9% in the third quarter. The GDP growth was much larger than analysts expected, thanks to government spending and business investment. This rapid GDP growth mocks last year’s expectations that the Federal Reserve’s interest rate hikes would push the U.S. into a recession at this time. This may also encourage the Federal Reserve to keep interest rates high for a longer period.
The U.S. Economy is Not Cooperating with the Federal Reserve’s Plan to Slow it Down by Raising Interest Rates
The U.S. GDP expanded by 4.9% in the third quarter of 2023 after adjusting for inflation, according to an initial estimate released by the Bureau of Economic Analysis on Thursday. This was an increase from the growth rate of 2.1% in the second quarter, and the fastest growth pace since the fourth quarter of 2021 when the economy was recovering from the pandemic’s impact. The growth was largely due to a 4% increase in consumer spending, the largest since the last three months of 2021.
Consumer Spending and Government Spending Drive Economic Growth
“Surpassing expectations and proving its strength once again, the third-quarter GDP report for 2023 confirmed the remarkable resilience of the U.S. economy under restrictive monetary policy”, wrote Ali Jafari, an economist at CIBC, in his comments. The growth exceeded the expected growth rate of 4.7% according to a survey of economists from Dow Jones Newswires and The Wall Street Journal, showcasing the astonishing amount of money American consumers are spending despite the numerous financial pressures they face.
Financial and Market Challenges Facing American Consumers
The Federal Reserve’s rate hikes aimed at combating inflation are increasing borrowing costs for credit cards, auto loans, mortgages, and other consumer loans. Additionally, people have had to spend more on necessities due to rapid inflation over the past two years. However, the labor market still favors workers, so wages have increased, and there is still money saved during the pandemic’s peak.
Increased Government Spending and Business Investment
Consumers were not the only ones spending freely—federal government spending also surged, thanks to increased defense spending with the U.S. military’s aid to Ukraine. Business investment also rose, with investment in housing increasing for the first time in over two years.
The Impact of Rapid GDP Growth on Monetary Policy
The rapid GDP growth mocks last year’s expectations that the Federal Reserve’s interest rate hikes would push the U.S. into a recession at this time. The Federal Reserve raised the benchmark interest rate to its highest level in 22 years to increase borrowing costs in an attempt to discourage borrowing and spending, hoping to rebalance supply and demand. According to economists, the strong GDP growth may force the Federal Reserve to continue to apply pressure to the economy by keeping interest rates high for a longer period.
Source: https://www.investopedia.com/shoppers-boosted-u-s-economic-growth-to-fastest-in-years-8382874
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