RALEIGH – News that the nation’s economy grew at a higher rate than previously reported in the third quarter could mean better or tougher times ahead, says two economic thought leaders. Wall Street reacted negatively, however.
US stocks fell Thursday on fears that the stronger-than-expected GDP could prompt the Fed to continue to raise rates more than expected in 2023. The Dow lost more than 400 points, or more than 1%, while the S&P 500 and Nasdaq were both down about 2% in late-morning trading.
America’s economy grew much faster than previously thought in the third quarter, a sign that the Federal Reserve’s battle to cool the economy to fight inflation by raising interest rates is having only limited impact.
Walden, however, isn’t overly worried about the Fed.
“This is a good news-bad news report,” Walden tells WRAL TechWire.
“Growth in GDP means the economy is expanding, which usually leads to better standards of living. That’s good.”
“[T]he Federal Reserve wants slower growth to take the pressure off prices. So one implication of the report is more interest rate hikes are on the way,” he warns.
“Still, if the economy continues growing while the inflation rate becomes more tolerable, that will be a great success for Fed policy – the so-called soft landing. Maybe this will be our national holiday gift!”
Workforce concerns worry Meredith economist
The Fed faces a real challenge to lower inflation if there’s no boost in the number of people working says Meredith College economist Dr. Ann Yorke.
“Until the labor force participation rate improves, I think that the Fed will continue to fight a losing battle that will end up causing too much harm to the economy as they continue to use a tool that decreases the demand for output.,” she tells WRAL TechWire.
‘Households are still spending’
Similar thoughts came from an economist at High Frequency Economics.
“Despite a rapid increase in interest rates, the economy is growing and importantly, households are still spending,″ Rubeela Farooqi, chief U.S. economist at that firm, said in a research note. “However, looking ahead, in 2023, we expect a slower growth trajectory.″
The Commerce Department’s final reading Thursday morning showed gross domestic product, the broadest measure of the US economy, grew at an annual pace of 3.2% between July and September. That was above the 2.9% estimate from a month ago. Economists surveyed by Refinitiv had expected GDP to stay unchanged from its previous reading.
The report said the stronger-than-expected reading was due to increases in exports and consumer spending that were partly offset by a decrease in spending on new housing. Consumer spending is responsible for more than two-thirds of the nation’s economic activity.
Fed’s ongoing battle
The Fed has been raising interest rates throughout the year to cool demand for goods and services and reduce inflation. Economists have been worried for quite some time that the Fed’s actions could tip the US economy into recession next year.
Inflation has cooled in recent readings, but the US economy has stayed strong. Some surveys released this week suggest the Fed’s higher rates are not slowing spending by businesses or consumers.
A recent survey of chief financial officers found the current level of interest rates have not impacted their spending plans. And consumer confidence improved in December according to a survey by the Conference Board, reaching the highest level since April.
Unemployment claims increase
A separate Labor Department report Thursday showed that unemployment claims remained relatively unchanged.
Initial weekly claims for unemployment insurance benefits ticked up to 216,000 for the week ended, December 17. The previous week’s total was upwardly revised by 3,000 to 214,000.
Economists were expecting initial claims to land at 222,000, according to Refinitiv.
The weekly initial claims totals are hovering around pre-pandemic levels. In 2019, weekly claims averaged 218,000.
Continuing claims, which include people who are collecting benefits on an ongoing basis, dropped slightly to 1.672 million for the week ended December 10. The prior week’s number of continuing claims were revised up to 1.678 million.
The final GDP report is one of most backward-looking readings the government releases, looking at the state of the economy nearly three months ago. The current forecast from economists is that growth in the current period will be only 2.4%, significantly slower than Thursday’s reading.