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Hot GDP print does not mean US economy is out of the woods

The US economy grew at its fastest pace in nearly two years during the past three months as consumers stepped up their spending despite a high interest rate environment.

But the surge in activity does not necessarily mean the economy is reaccelerating, according to economists.

“The 4.9% annualized jump in GDP in the third quarter and the strength of the monthly data through September means it is now unlikely a recession begins before year end, as we have in our baseline,” wrote Oxford Economics lead US economist Michael Pearce. “However, much of that strength was driven by a sharp fall in the saving rate, a strong rise in government spending and a jump in inventory accumulation, all of which won’t be sustained.”

“There are also signs that monetary tightening is weighing on investment spending and with financial conditions still tightening, we still expect a sharp downturn over coming quarter,” the economist warned, adding the bulk of that weakness will likely show up in the first half of 2024.

EY Chief Economist Gregory Daco agreed, writing in a note on Thursday, “While these signs of economic strength will fuel speculations that the economy is reaccelerating, we do not expect such strong momentum will be sustained.”

The analyst added, “The recent rapid tightening of financial conditions spurred by surging bond yields represents a material headwind for business investment and consumer spending.” Coupled with “tighter credit conditions, the restart of student loan payments, certainty regarding the lagged impact of monetary policy and a fragile global economic backdrop, real GDP growth is likely to drift below trend for several quarters. We foresee real GDP growing a muted 1.4% in 2024 following expected growth of 2.4% in 2023.”

The GDP figure will be among the data considered by the Federal Reserve at its policy meeting next week.

“While this is not good news for the Federal Reserve, the fact that the disinflationary process continued on a year-earlier basis could take some pressure off,” Raymond James’ Chief Economist Eugenio Aleman wrote.

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