US Economy Defies Recession Fears with Strong Growth

Despite concerns voiced by some on Wall Street about a potential economic recession, recent economic data has revealed that the U.S. economy is actually growing at a faster pace than previously believed. Figures released last week indicate that the U.S. GDP for the second quarter has been revised upward from 3.3% to 3.8%, driven by strong consumer spending. This comes after a dip in the first quarter GDP, which was impacted by trade war initiated by former President Donald Trump. Economic growth has gained further momentum in the third quarter. Data released last Thursday showed that orders for durable goods in August exceeded expectations. The personal income and spending report released the following day revealed that consumer spending remained robust in August and also surpassed expectations. Given that consumer spending accounts for over two-thirds of the U.S. economy, this growth is more than enough to offset the weakness in the housing market, which continues to be impacted by high home prices and elevated mortgage rates. The Atlanta Federal Reserve's GDP tracking model is now revising its estimate for third-quarter growth upward from 3.3% to 3.9%, based on consumer data and a narrowing trade deficit in August.

Positive Growth Outlook

This high growth may not have peaked yet. Stephen Brown, deputy chief North America economist at Capital Economics, said in a note last Friday that the income and spending data should further alleviate concerns about the “U.S. economy being on the brink of a sharp slowdown.” He also pointed out that it is discretionary spending – which is typically cut when consumers are financially strained – that is driving economic growth. Although consumer spending growth has outpaced income growth over the past three months, the saving rate in August remained at a relatively high level of 4.6%, suggesting that consumers have not yet overextended themselves. Brown added, “The growth in real consumer spending in August suggests that, given the strong economic momentum at the start of the third quarter, we are now revising our tracking value for third-quarter consumer spending growth from 2.3% in the previous week to 3.3%. Third-quarter GDP growth is expected to reach 4%.”

Implications of Strong Growth

However, strong GDP growth also means that the pressure on the Federal Reserve to cut interest rates sharply will be reduced. Capital Economics expects the Federal Reserve to cut interest rates only once in its remaining two meetings this year. While Wall Street is betting on interest rate cuts in both meetings.

Recession Fears Linger

This optimistic growth forecast stands in contrast to the warning from Mark Zandi, chief economist at Moody’s Analytics, who said that the U.S. economy is “on the edge of recession.” Although the performance of the U.S. economy in the third quarter, which will end on Tuesday, looks good, Zandi predicts that the U.S. will face the highest risk of recession at the end of this year and the beginning of next year, as the impact of Trump’s tariff policies and immigration restrictions peak. In addition, despite the resilience of consumer spending under high inflation and tariff pressure, the housing market could still drag the economy down. Zandi points out that building permits are the most critical economic indicator for predicting recessions, and they have now fallen to their lowest levels in the pandemic period.

Disparities in Consumer Spending

The overall growth in consumer spending also masks a significant disparity between American consumer groups, and the increasing reliance of the economy on high-income earners. Recent Moody’s estimates show that since the pandemic, spending by the lowest-income 80% has only grown in line with inflation, while the highest-income 20% are the main drivers of consumption growth. Zandi points out: “As long as this group of high-income earners continues to spend, the economy should be able to avoid a recession; but if they become more cautious for any reason, the economy will be in big trouble."