The American economy is showcasing an incredible surge, reminiscent of the unstoppable Energizer bunny, as it continues to defy predictions of a slowdown. Recent data is suggesting that the economy might even achieve an annualized growth rate of nearly 6% in the third quarter, a level not often reached since 2000.
Much like the iconic pink mechanical hare that keeps going and going due to its long-lasting batteries, the American economy is proving its resilience and stamina. Despite numerous forecasts of a potential downturn, the economy is persistently moving forward, outperforming expectations and confounding analysts.
Recent data points have consistently surpassed projections, leading analysts to revise their forecasts upwards. In July, new orders for manufacturing firms reached a nine-month high, while retail sales remained robust, spanning various sectors from restaurants to online shopping and clothing to sports goods. The construction industry also saw a boost, propelled by a resurgence in homebuilding. The labor market has played a crucial role, maintaining its strength and making it relatively easy for job seekers to find employment at competitive wages. This trend has contributed to the overall growth of jobs in the U.S., surpassing the growth rate of the working-age population and maintaining the unemployment rate at an impressive 3.5%.
However, the surge in growth also raises concerns about potential overheating and lasting inflation challenges. This quarter’s projected GDP figures are leaning towards a scenario that resembles more of a “no landing” than the previously expected “soft landing.” The Atlanta branch of the Federal Reserve employs a real-time estimation technique called nowcasting, which suggests that the economy could expand by 5.8% in the third quarter. This outcome is surprising, considering the series of aggressive interest rate hikes carried out by the Fed over the past year.
Yet, skepticism remains. The nowcasting technique typically overestimates the economy’s strength at this point in the quarterly cycle. Despite this, the Atlanta Fed’s nowcast, while possibly exaggerated, generally provides a directionally accurate outlook. Thus, the conclusion is clear: America’s economy is not merely holding its ground but is indeed forging ahead.
While inflationary pressures have momentarily eased in recent months, concerns about its resurgence persist. Core prices, excluding volatile food and energy costs, have risen at their slowest rate in more than two years. However, an increasingly dynamic economy could reignite inflation, especially with shortages of labor and housing potentially leading to a significant uptick in prices next year.
The American economy’s robustness has also led to shifts in the financial landscape. Rising yields on government bonds, driven by investors selling off since May, have spurred discussions on the adjustment of short-term interest rates by the Fed. The increase in yields has also heightened funding costs for financial institutions, impacting smaller lenders and causing credit-rating agencies to downgrade some banks.
Additionally, consumers are beginning to feel the impact of higher borrowing costs, as delinquencies on credit cards and car loans experience an uptick. Housing, an area that has shown remarkable resilience, is facing challenges due to rising mortgage rates, dampening existing home sales and potentially affecting homebuilding and construction.
While the American economy has a history of overcoming obstacles, it’s important to recognize that even the strongest batteries eventually deplete. The analogy of the Energizer bunny’s batteries never fading doesn’t always hold true in real-life economics. The American economy’s boundless energy will eventually encounter its own limitations, reminding us that even the most exceptional growth has its limits.