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The economy’s resilience is a product of a strong job market and extra pandemic savings, which have made it possible for people to keep spending despite inflation and rising interest rates. Robust government hiring — including 214,000 new jobs between July and September — also added to overall strength.
“It’s enough to knock me over with a feather,” said Diane Swonk, chief economist at KPMG. “We’ve had the most aggressive credit tightening from the Federal Reserve since the 1980s and, guess what, the economy’s accelerating. We really underestimated how much consumers could keep spending.”
What isn’t clear yet is whether higher borrowing costs could reverse some of these gains in the months to come. Economists say that acceleration in economic growth is likely to slow later this year, as pandemic-era savings dry up and millions of households resume student loan payments. Fears of a government shutdown, ongoing strikes by actors and autoworkers, and worsening wars in Ukraine and Gaza are also adding to the uncertainty.
“The U.S. consumer has so been hanging tough and powering the economy forward, but I expect much slower growth the rest of the year,” said Mark Zandi, chief economist at Moody’s Analytics, who expects economic growth to slow to an annualized rate of 1 percent in the fourth quarter. “There are a lot of headwinds out there.”
In Cincinnati, Dominique Walker just made her first student loan payment in more than three years — which means she’s rethinking all sorts of other expenses, including manicures, massages and morning coffees. She’s packing her lunch a lot more and expects to spend less this holiday season than she has been.
“I’m having to rebalance things,” said Walker, 32, a data management specialist at a hospital. “That extra $305 a month, that has to come from somewhere.”
The Fed has lifted borrowing costs 11 times since March 2022, with the goal of slowing the economy enough to stabilize prices. Mortgage rates, at 7.6 percent, are at a two-decade high, and the housing market has all but come to a standstill. But economists say that has freed up Americans to spend elsewhere. Expenditures at restaurants, movie theaters and sporting events have all risen in the past few months, helping support continued hiring in those industries.
Meanwhile, inflation has moderated — to 3.7 percent from last summer’s peak of 9.1 percent — though it remains far higher than the Fed would like.
The spate of growth is welcome news for the White House, which has invested heavily in infrastructure as part of its “Bidenomics” plan. But despite $302 billion in spending, it has struggled to convince voters that its economic policies are working for them. Biden’s ratings on economic matters are lower than ever, with just 32 percent of Americans saying they approve of the president’s handling of the economy in a recent CNBC poll.
The wealthiest Americans, though, remain flush with cash. Zandi estimates U.S. households are still sitting on $1.7 trillion in extra pandemic savings, with the top 20 percent accounting for more than half of that balance.
That’s allowed many families to keep shelling out on luxuries such as travel and entertainment. Americans spent billions this summer to see Beyoncé and Taylor Swift in concert, and “Barbie” on the big screen. Travel picked up, too: A record 33 percent of U.S. households said they took a vacation this summer, according to a survey by the Federal Reserve.
At Lily Pond Luxury, bookings for upscale vacations are up 40 percent so far this year. Demand has been so brisk that owner McLean Robbins, who ran a one-woman shop before the pandemic, now has a team of 12.
“We’re seeing massive spending,” she said. “It’s all about big groups, big suites, big spending — I’m talking six figures just for Taylor Swift tickets or a trip to Antarctica.”
Even so, customers have been reluctant to book ahead lately — not for financial reasons, but because they’re worried about the state of geopolitical affairs. The escalating war between Israel and Gaza and general geopolitical unrest is keeping some from locking down new vacations.
“We’re seeing hesitation even in our most intrepid travelers,” she said. “They’re saying, ‘I don’t know, maybe we should rethink Morocco. There are too many bad things happening in the world.’”
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