Good morning. Will Daniel here, filling in for Sheryl.
Did “revenge spending” save the economy from recession?
That’s one theory circulating in light of last week’s strong GDP numbers. In brief, the idea is that Americans—still flush with excess savings built up during the pandemic, as well as a strong labor market—flocked to enough Taylor Swift concerts, movie theaters, and hotels to save the economy. But how long can the pattern last? Jeffrey Roach, chief economist at LPL Financial, argued that it’s a last gasp from consumers. “The real question is if the trend can continue in the coming quarters, and we think not,” he said.
As I wrote in Fortune:
The Biden administration was quick to celebrate the surge in U.S. economic growth after years of consistent recession predictions from Wall Street. Ever since inflation surged to a four-decade high of over 9% in June 2022, a chorus of experts has repeatedly warned that the Federal Reserve may need to hike interest rates until the economy slips into recession if it truly wants to restore price stability for consumers. But President Biden rebuked that thinking on Thursday.
“I never believed we would need a recession to bring inflation down—and today we saw again that the American economy continues to grow even as inflation has come down,” he said in a statement. “It is a testament to the resilience of American consumers and American workers, supported by Bidenomics—my plan to grow the economy by growing the middle class.”
However not everyone was ready to pop the champagne.
Mark Hamrick, a senior economic analyst at Bankrate noted the economy still faces “substantial headwinds,” including the Federal Reserve’s “higher for longer” interest rate policy, surging Treasury yields, and the potential for a partial federal government shutdown in November due to gridlock in Washington over the federal budget. On top of that, the threat of geopolitical instability is rising as the Russia-Ukraine and Israel-Hamas conflicts continue.
“Expectations are muted for the intermediate term amid no shortage of sources of uncertainty,” Hamrick said of the economy. “There’s no guarantee that recent substantial momentum can be sustained.”
Hamrick concluded: “Take a good look at the estimate for third-quarter GDP because it could be the highest that we see for a while.”
Will Daniel
Will.Daniel@fortune.com
