2023-11-04 08:52:44
THE US economy remained resistant to significant tightening of its monetary policy Federal Reserve Bank (Fed) in the third quarter of the year, posting an annualized growth rate of 4.9%, more than double the previous quarter’s 2.1% and the long-term GDP growth rate.
Personal consumption remained the main driver of economic growth, contributing 2.7 percentage points, more than half of overall GDP growth. With real disposable income strengthening by only 1.9% (mainly due to increased tax liabilities and lower wage growth), the rise in consumption was mainly financed by the large fall in saving (-1.4 pps in 3, 8%).
Coupled with the resumption of student loan payments (which are the largest debt for households after mortgages), the tightening of bank lending conditions, and signs of easing labor market conditions (the employment cost index fell July-September period for the third consecutive quarter on an annualized basis, at 4.3%), the significant decline in savings reinforces the view that personal consumption may lose momentum resulting in a slowdown in the economy’s growth rate in the coming quarters.
Despite growth accelerating in the third quarter and inflation holding well above its medium-term target, the Fed left interest rates unchanged at the two-day meeting ending Nov. 1 to buy some time to assess the impact on the economy from significant tightening of financial conditions in recent months, particularly due to the large increase in long-term bond yields. The overall tone of the official announcement, as well as comments from Chairman Jerome Powell regarding uncertainty over whether sufficient monetary policy tightening has been achieved to ensure inflation further declines to the 2.0% target, make it clear that the possibility further rate hikes is not completely ruled out as economic activity may continue to surge upwards, keeping inflationary pressures high.
Undoubtedly, the labor market, despite signs of easing, continues to be characterized by a high degree of tightness and the rate of wage growth remains strong.
*EUROBANK RESEARCH
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