Editor’s note: N.C. State economist Dr. Mike Walden is a frequent contributor to WRAL TechWire. He offers his analysis of the latest GDP report along with reaction to the Fed’s latest interest rate hike on Wednesday. Economists have been divided about whether the fed’s moves will lead to a recession. Walden sees more signs of a “soft landing” now. Here’s the latest.
RALEIGH – Today’s second quarter GDP report came in higher than expected, showing the economy continues to expand despite interest rate hikes and fears of a recession.
The GDP number is important because it represents the broadest measure of the economy. Consumers continue to spend, especially on services. Imports fell, meaning more of the spending was a going to domestic firms. Business investment also rose.
The report gives support to the Fed’s goal of a “soft landing” in the economy, meaning the inflation rate is decreased without causing a recession. Of course, the numbers in the report happened prior to [Wednesday’s] latest rate hike by the Fed, so the numbers may change for the third quarter. Still, officials at the Fed should be pleased by the report.
A major reason economists have been confused by the economic outlook is because we are not a a typical business cycle situation. That is, usually, with the degree of interest rate increases the Fed has made to curtail inflation, the economy would be seriously slowing by now. We’re not seeing that.
I think a major reason is that we’re still in a Covid-recovery period. Many businesses still want to hire, and many households are still buying to make up for the purchases they couldn’t make during Covid. But if, and when, the Covid recovery runs its course, then the typical business cycle could take over and cause the economy to stumble.
We are certainly living in unique and interesting times.
What next for interest rates?
Earlier, Walden reacted to the Fed’s latest interest rate hike announced on Wednesday:
If the Fed’s policy works out, we will see a continued decline in the inflation rate, perhaps hitting their goal of a 2% year-over-year inflation rate by the end of 2023 or beginning of 2024.
If this occurs – and if the lower inflation rate is sustained – this sets up a possible situation for the Fed to begin lowering interest rates sometime in the first half of 2024. Such a policy will lead to lower interest rates across the board – for mortgages, car loans, credit cards, etc.