October 30, 2023
The U.S. economy has remained resilient this year, buoyed by a tight labor market and robust consumer spending. Gross domestic product (GDP), released last week, showed the economy grew at a 4.9% annualized pace in the third quarter, which was the highest since the fourth quarter of 2021. The pace of growth was more than double second quarter’s 2.1%.
Because consumer spending makes up 70% of GDP, it is not surprising it was behind the quarter’s strong growth, with personal consumption up 4.0%, its highest reading since the fourth quarter of 2021.
But how long can growth remain resilient against the backdrop of higher rates? There is evidence excess savings among households have declined; but unlike prior tightening cycles, consumers and businesses are well positioned after refinancing debt during the near-zero interest rate environment following the Global Financial Crisis of 2008.
Although we expect the lagged impact of tightening to soften growth over the next few quarters, healthy consumer and business balance sheets should help mitigate the risk of a serious economic downturn. Consistent with consensus estimates that growth will slow, we expect U.S. GDP to come in around 0.5% - 1.5% in 2024, down from an expected 2.2% in 2023.
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