The economy is stronger, and inflation more tenacious, than the central bank has projected. Another interest-rate hike seems warranted.
The U.S. economy has something in common with baseball’s World Series, which finally got under way on Oct. 27. The series pits two good, but not great teams against each other: the Texas Rangers and the Arizona Diamondbacks, who made it to the Fall Classic by parlaying their Wild Card finishes through the postseason playoffs to their respective league championships.
More than half of third-quarter growth came from consumer spending, which accounted for 2.7 percentage points of the 4.9% GDP tally, according to a breakdown by Macquarie North America economists David Doyle and Neil Shankar. We were spending on experiences, like Taylor Swift and Beyoncé concerts, including travel, hotels, and of course, the merch. But they noted that the splurge came out of savings, as real disposable spending contracted for three consecutive months through August.
The real value of the GDP report is in what it implies for the quarter ahead, writes Steven Blitz, chief U.S. economist for TS Lombard. For the final three months of the year, he sees growth slowing to a 1.5% annual rate as fiscal policy’s tailwind abates and the Fed’s rate hikes begin to bite. The economy’s current growth and Fed policy makers’ intent to lower inflation would make the interest-rate policies from the mid-1980s to the mid-1990s, when rates were kept at or above nominal GDP, more appropriate. By contrast, interest rates in the inflationary period from the late 1960s through the 1970s were kept below nominal GDP, writes Martin Barnes, former chief economist of BCA Research, in the November Bank Credit Analyst.
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