After Strong Third Quarter, US Economy Expected to Slow

The U.S. Commerce Department is expected to report third-quarter gross domestic product this week. Analysts keenly await this measure, which is the broadest measure of economic output. Early indications point to a strong period of economic growth from July through September. This is despite higher interest rates, depleted pandemic savings, and high inflation.

The economy is expected to keep growing through the end of the year, though at a slower rate. Several economists contend that an end-of-year stock rally is also likely.

The expectation that the economy won’t pick up even more strength may keep the Federal Reserve on track to cutting rates sometime in 2024, since surging demand outpacing supply could be keeping some upward pressure on prices. However, the trajectory of inflation will ultimately decide how early in the year the Fed begins to cut rates.

Fed Chair Jerome Powell has said the central bank needs to see “below-trend growth” to be assured that inflation is on track to slow to 2%, the Fed’s inflation target.

The Fed cuts interest rates whenever unemployment rises sharply or if inflation consistently hovers below 2%. The central bank also doesn’t have any incentive to restrict the economy through elevated interest rates if inflation is already under control. Some economists predict rate cuts to begin by the middle of next year.

The Fed’s main strategy to defeat inflation is by slowing demand through rate increases, since higher interest rates make borrowing more expensive, thus prompting consumers to curb their spending.