Will Summer Sizzle Fizzle?

Never underestimate the ability of Americans to bounce back from hard economic times. From the depths of recessions to banking and market meltdowns, and most recently, from our once-in a century pandemic, experts have often missed the mark on this consistent trend.

That misjudgment was seen most recently in the government’s report of third quarter growth, which was a summer sizzler. Gross domestic product (GDP), which tallies the value of goods and services sold in the U.S., increased by an annualized pace of ­4.9 percent in the third quarter, up from 2.1 percent in the second quarter and 2.2 percent in the first. The stronger than expected reading was the fastest growth since late 2021 and was propelled by consumer spending, which accelerated to 4 percent in the third quarter, from a more subdued 0.8 percent in the second.

Whether this was the Taylor Swift effect, a surge in summer travel or back to school spending, the trend was clear: consumers once again defied expectations. As a reminder, it was just January of this year, when economists were almost universal in their belief that the economy would tip into a recession, due to the lagging effect of high prices and the Fed’s aggressive interest rate hike campaign to quell that very inflation. How did they get it so wrong? 

Although we are all used to hearing “past performance is no indication of future success”, economists rely on history to guide their projections. In the past, when the Fed has raised interest rates by so much and so quickly, it has led to a meaningful slowdown, and often, a recession. This time, that has not been the case, perhaps due to the large amount of COVID stimulus dollars that helped to build up savings and the unusually resilient jobs market. Those factors have contributed to brisk spending on both goods and services this year and have put talk of recession on the back burner.

The real question is if consumers can continue to fuel growth in the coming quarters, as the resumption of student loan repayments kick in, alongside still stubborn price pressures and a moderation of wage growth. The Federal Reserve will be contemplating this issue at its upcoming two-day policy meeting.

Although growth has been strong, inflation has been retreating, which likely means that the central bankers will hold off on any action at this meeting, though they will leave the door open for a hike at the final meeting of the year in December. Currently, markets predict just under a 20 percent chance of a quarter-point increase at that Fed confab.