Strong US economic growth for last quarter likely reflected consumers' resistance to Fed rate hikes

The government is expected to report stellar growth for the U.S. economy during the July-September quarter, highlighting the durability of consumer and business spending despite the Federal Reserve's efforts to cool the expansion with high interest rates

Strong US economic growth for last quarter likely reflected consumers' resistance to Fed rate hikes

WASHINGTON, D.C. (AP) - The U.S. government will report on Thursday the stellar growth of the U.S. economic during the quarter July-September. This will highlight the resilience of consumer and corporate spending despite efforts by the Federal Reserve to cool down the expansion through high interest rates.

The robust growth of the last quarter will likely be the high point for the economy, before a gradual slowdown begins in the current quarter, October-December, and continues into 2024.

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The Biden administration will certainly use the report on Thursday to show how its policies have spurred solid growth. However, surveys indicate that the majority of Americans are not happy with the way the president has handled the economy.

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According to FactSet's survey of economists, the Commerce Department is expected to release figures showing that the nation's Gross Domestic Product -- the total output of goods & services in the economy -- grew at a pace of 3.8% annually during the third quarter. If true, this would be the fastest pace of growth in almost two years. It is also a significant increase from the 2.1% rate of growth in the April-June period. Some economists estimate that the annual growth rate for last quarter could be as high at 4.5%.

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Americans are likely to have driven the economy through their increased spending on everything from concert tickets to restaurant meals. Businesses also spent on new buildings and factories, and they likely increased their stockpiles, which boosts production.

The economy is still expected to slow down from its current pace, as consumers will likely cut back on their spending during the last three months of the calendar year and the housing market's sluggishness is hurting the economy. Nearly 30 million people started repaying student loans this month. This could affect their spending power. Since the pandemic began three years ago, these loan repayments were suspended.

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Other challenges are also facing the economy, such as a rise in interest rates for longer-term loans since July. The average 30-year rate of mortgage is nearing 8%. This is a record high for 23 years, and makes home ownership out-of-reach for many Americans.

Fed officials acknowledged that the growth has picked up, which could undermine their efforts to combat inflation. Brisk consumer spending usually leads to companies, including those who sell physical goods and those in the vast service sector, such as restaurants and entertainment venues that provide services, to increase prices. This fuels inflation.

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Fed Chair Jerome Powell said in a recent discussion that he was pleased with the way in which the economy is evolving. Inflation, a rate of 9.1% per year in June 2022, has dropped to 3.7% annually. At the same, the steady growth and hiring has prevented the recession widely predicted by many at the end last year.

If these trends continue, the Fed could achieve the highly desired "soft landing," where the central bank manages to slow the inflation to its 2% goal without causing a recession.

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Powell acknowledged, however, that the Fed may have to increase rates in the future if the economy continues to grow strongly. The benchmark short-term interest rate for many consumer and small business loans is at a record high of 5.4%.

Powell stated last week that 'additional evidence of persistently over-trend growth' could put future progress on inflation in danger and warrant tightening monetary policy.

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Fed officials were shocked by the government's report on retail sales last week, which revealed that consumer spending in stores and restaurants increased by more than they expected. Americans spend more on both necessities such as groceries and gas, as well as discretionary items like cars and restaurant meals.

Consumers may continue to resist efforts by the Fed to cool the economy and spending. Students who borrowed student loans began repaying them before the end of the moratorium on Oct. 1. This suggests that many were able, for the time being, to pay their debts without cutting back in other areas.

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In a research note, JPMorgan's economists write that they view the initial jump as an indication that households are willing and capable of resuming these payments without having to reduce their spending.

While high mortgage rates have slowed the sale of existing homes in the United States, the vast majority still pay low rates, which are fixed for 30 year, meaning their housing costs are low, even when the Fed raises rates. This is in contrast to the mortgages of homeowners from Europe and the United Kingdom, where rates are usually floating. According to Redfin, online brokerage firm, eight out of 10 U.S. home owners have mortgage rates below 5%.

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The Fed will likely keep its short term rate unchanged at their meeting next week, as inflation is generally on the decline. Many economists expect that the central bank policymakers will also keep interest rates at their current level when they meet again in December.

Powell's news conference on Wednesday will be closely watched for hints as to the Fed’s next move.