Despite High Interest Rates, US Economy Booms...Q3 GDP Surges 4.9% Unexpectedly (Comprehensive)

U.S. third-quarter gross domestic product (GDP) increased by 4.9% year-on-year, marking the strongest growth in two years. Despite high interest rates and inflation, strong consumer spending in the U.S. this summer led to this surprising growth. However, warnings are pouring in that such growth is unlikely to continue beyond the fourth quarter, considering the recent sharp rise in Treasury yields and the cumulative effects of tightening.

According to the U.S. Department of Commerce on the 26th (local time), the preliminary GDP growth rate for the third quarter was recorded at an annualized 4.9%. This is the highest growth rate since the 7.0% growth recorded in the fourth quarter of 2021 due to the base effect after the pandemic. It not only surged compared to the previous quarter (2.1%) but also exceeded market forecasts compiled by Bloomberg (4.3%) and Dow Jones (4.7%). U.S. GDP is announced three times: preliminary, revised, and final.

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Consumption was the main driver of the strong growth in the third quarter. The personal consumption growth rate rose sharply to 4.0% from 0.8% in the second quarter. In particular, local analysts attribute the U.S. consumer market’s momentum this summer to entertainment sectors such as Taylor Swift and Beyonc?’s tours, and the box office success of the movies 'Barbie' and 'Oppenheimer'. Private investment also contributed to the third-quarter growth by increasing 8.4%. Housing investment, which had declined in the second quarter, rose by 3.9%. Government spending increased by 4.6% as well.

This contrasts with earlier in the year when there were predictions of a recession hitting the U.S. economy around this time. Bloomberg News assessed that "the U.S. economy is maintaining solid growth," adding that "household spending, supported by a strong labor market, is driving the economy." The robust labor market is especially considered the foundation for consumer spending, which leads the real economy. Inflation has eased while wage growth continues, supporting spending. Previously, the U.S. Department of Labor reported that nonfarm payrolls increased by 336,000 in September, nearly double the market expectation of 170,000.

U.S. President Joe Biden praised this GDP growth in a statement, attributing it to 'Bidenomics.' He said, "I never believed that taming inflation had to come with a recession, and I am seeing the U.S. economy continue to grow even after inflation has started to ease," emphasizing that "this is a sign of the resilience of American consumers and workers supported by Bidenomics."

However, concerns and warnings about the U.S. economy after the fourth quarter are growing on Wall Street. Despite cumulative tightening, persistently high inflation, depletion of excess savings since the pandemic, and a surge in credit card delinquencies are expected to negatively impact the economy going forward. Based on recent forecasts of prolonged high interest rates, the U.S. 10-year Treasury yield, a global benchmark, previously surpassed 5%. Such high market interest rates increase borrowing costs for mortgages, credit cards, car purchases, and corporate loans, which could further intensify downward pressure on the economy. The resumption of student loan repayments this month, emerging geopolitical risks from the Middle East, and ongoing strikes by the United Auto Workers union are also factors that could have adverse effects. The Wall Street Journal (WSJ) warned that "the economy’s resilience will soon be tested," signaling the possibility of a slowdown.

Recent warnings from Wall Street heavyweights like Jamie Dimon, CEO of JPMorgan, and Bill Ackman to prepare for an economic downturn are in this context. Ray Dalio, CEO of Bridgewater Associates, described the global economic outlook for next year as "pessimistic." Bill Gross, known as the 'Bond King,' also pointed out recent collapses of regional banks and rising auto loan delinquencies in a post on X, predicting a "recession in the fourth quarter."

Andrew Hunter, chief economist at Capital Economics, told the WSJ, “It would be very surprising if consumption growth remains this strong in the fourth quarter,” adding, “There is room for a bigger hit to start taking effect due to interest rate hikes and various headwinds.”