Consumer and government spending to boost Q3 GDP.
Is the US Economy on the Verge of a Soft Landing?
The upcoming release of third-quarter gross domestic product (GDP) numbers by the Bureau of Economic Analysis (BEA) on Oct. 26 could provide insight into the state of the US economy. It may indicate whether the economy is heading towards a soft landing or if the strong growth experienced in the July-to-September period was just a temporary boost.
Early estimates suggest that the US economy expanded even more than in the second quarter.
The Federal Reserve Bank of Atlanta’s GDPNow model estimate shows that US output in the recent quarter was 5.4 percent, while the New York Fed Nowcast suggests that the economy grew by 2.55 percent. The St. Louis Fed’s Real GDPNowcast forecasts a print of 2.3 percent.
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JPMorgan Chase revised its third-quarter GDP forecast upward to 4.3 percent from 3.5 percent, while KPMG Chief Economist Diane Swonk is projecting a 5.5 percent reading.
Economists believe that the third-quarter GDP growth rate holds significant implications, especially for monetary policy.
Fed Chair Jerome Powell has emphasized the need for below-trend economic growth before considering a sustainable return to the 2 percent inflation target. The aim is to slow demand and ease inflationary pressures through higher interest rates. However, despite rising rates and elevated inflation, consumer spending has remained strong.
Retail sales and personal spending have shown consistent growth, and the labor market has performed well, with new job creation and low unemployment rates.
However, Gregory Daco, chief economist at EY-Parthenon, warns against assuming that this strong momentum will continue.
“The US economy continued to show remarkable resilience over the summer, with surprisingly robust job growth and an unexpected consumer spending spree that likely propelled real GDP growth above 5% annualized in Q3,” he wrote in a note. “While these signs of economic strength will likely fuel speculations that the economy is reaccelerating, we do not expect such strong momentum will be sustained.”
The US economy faces various economic challenges, including tightening lending standards, surging Treasury yields, eroding pandemic-era savings, rising corporate bankruptcies, and above-trend inflation. Geopolitical tensions and foreign conflicts could also impact the economic landscape.
On the other hand, government spending has played a significant role in supporting the gross domestic product.
Government Spending and GDP
Spending by federal and state governments has risen to the point where it is propping up the GDP.
Last year, federal net outlays as a percentage of GDP were 25 percent, the highest since World War II.
In the second quarter, government consumption rose at an annualized pace of 3.3 percent, with federal spending, national defense, and state and local government outlays all increasing.
The effects of recent legislative initiatives, such as the Inflation Reduction Act and the U.S. CHIPS and Science Act, are starting to show in the data. Companies, both domestic and foreign, have taken advantage of subsidies to invest in factories, produce goods, and hire workers.
President Joe Biden’s administration aims to restore the public sector as a partner in long-run growth, with a focus on infrastructure and workforce development.
However, government payrolls have also grown, accounting for a significant portion of job creation in 2023. The administration’s spending strategy aligns with economist John Maynard Keynes’ recommendation of deficit-financed spending to stimulate the economy.
While the government has had no trouble spending on public works projects, there are concerns about the country’s fiscal path. Recent Treasury auctions have shown weakened demand for bonds, indicating apprehension about the government’s ability to manage its deficits.
The current administration hopes that its investment efforts will eventually lead to higher tax revenue, helping to fund the growing deficits.
As the US economy navigates these challenges, the third-quarter GDP numbers will provide valuable insights into its trajectory and the potential for a soft landing.
How has government spending impacted recent economic growth and what concerns are there about its sustainability?
Economic Outlook
Government spending has been a major driver of economic growth in recent years. The pandemic relief measures and infrastructure investments have provided a boost to the economy. However, there are concerns about the sustainability of this spending and the impact it may have on inflation and interest rates.
The Federal Reserve has been closely monitoring these developments and has already begun tapering its monthly bond purchases. This reduction in monetary stimulus is a signal that the central bank believes the economy is on a path towards a soft landing, with growth moderating to a sustainable level.
However, there are differing opinions among economists about the future trajectory of the economy. Some argue that the strong consumer spending and labor market performance will continue to support growth, while others believe that the challenges mentioned earlier will hinder economic expansion.
It is important to note that the COVID-19 pandemic continues to pose risks to the economy. The emergence of new variants and the potential for additional waves of infection could disrupt economic activity and dampen consumer confidence. The path of the pandemic remains unpredictable, and its impact on the economy cannot be ignored.
In conclusion, the upcoming release of third-quarter GDP numbers will provide valuable insights into the state of the US economy. While there are indications of strong growth, there are also challenges and uncertainties that need to be taken into account. The Federal Reserve’s approach to monetary policy and the government’s fiscal decisions will play a crucial role in determining whether the economy achieves a soft landing or faces more significant turbulence in the months ahead.
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