It looks like the U.S. slump that was supposed to happen has turned into an economic boom that won’t end.
For the second quarter in a row, the economy is expected to grow at an incredibly fast rate. And there aren’t many signs that it will slow down.
Things like this shouldn’t have happened.
Wall Street SPX 0.08% DJIA -0.61% experts and Federal Reserve leaders thought that the economy would slow down a lot this year because of the high interest rates that were put in place to stop inflation from getting out of hand. The economy usually slows down when it costs a lot to borrow money.
“Many people were expecting a recession,” said Olu Omodunbi, who is the top economist at Huntington Private Bank in Columbus, Ohio.
Instead, a widely forecast recession never materialized and the economy even sped up. Now some forecasters are raising their estimates for economic growth in 2025.
“We don’t see where the weakness is going to come from,” said senior U.S. economist Matthew Martin of Oxford Economics. “We are continually putting our forecasts higher.”
Oxford just raised its estimate for gross domestic product in 2025 to 2.5% from 2.0%. The U.S. grew nearly 3% in 2023 and could turn in a similar performance this year.
GDP is the official scorecard of the economy. Until very recently, analysts believed the economy could only grow only about 1.8% a year under ideal conditions. Now that assumption is being questioned.
Crosscurrents in the economy
There is no doubt that the country is not in great shape.
Three years of high inflation have made things hard for millions of families, especially those with low incomes. Not as many jobs are being filled, and the jobless rate has gone over 4% for the first time in over three years.
These different currents help explain why a lot of Americans are negative and might be ready to vote for former President Donald Trump again in two weeks. He is in a close race with Vice President Kamala Harris.
Still, the main story is the growth of the business as a whole.
Andrew Husby, a senior U.S. economist at BNP Paribas, said, “GDP is pretty amazing when you think about how tight interest rates are.”
In what ways does the business stay strong?
A bigger work force, higher household wealth, and rising productivity are the three major reasons given by analysts. A small amount of money also helps the government spend
More people are working.
One of the main things that causes economies to grow is more people working. When people spend more, businesses make more money and need to hire more workers to keep up.
For one thing, the number of workers in the U.S. between the ages of 25 and 54 has almost reached a record high.
A lot of foreigners have come to work in the US since Biden took office, which is a more controversial source of labor.
Taking in millions of new immigrants can be expensive, but they have helped ease the worst labor shortage in modern U.S. history and may have stopped rising wages from being a source of inflation.
Will Compernolle, a macro strategist at FHN Financial, said, “It helped to meet the demand for labor without making the economy too hot.” “Everyone thought it wouldn’t happen.”
More work is being done.
Getting more work done might have been an even bigger surprise.
There are more things and services being made in the same amount of time now than there were a few years ago. Businesses can pay their workers more when that happens because they make more money.
In the year ending in the second quarter, productivity growth sped up at a strong 2.7% rate, which is more than double the average yearly rate from 2010 to 2019.
Some of the rise may be a short-term “catch-up” after the pandemic, but many experts believe that companies are better at using technology and teaching their employees how to use it. An upcoming change in AI could even be the next big thing that sets things in motion.
“Not only is the work force bigger, but it’s also more productive,” said Martin of Oxford Economics.
Spending by households
Shopping, which is the main thing that makes the economy go, is the last big thing that stops U.S. growth.
It’s still very low unemployment, even though it’s gone up. Most people who want a job have one. It’s easy for Americans to spend because they have jobs.
Last year, however, incomes finally started to rise faster than inflation, which gave Americans some room to breathe. Their wealth has grown thanks to rising home prices and record stock market gains, especially for families with higher incomes.
Plus, most families still have a lot of money saved up. In August, the savings rate was 5.2%, which is not too far below what it was before the pandemic.
Husky said, “Consumer balance sheets are in very good shape.” “Families can still spend a good amount of money.”
There is a story behind the numbers. In the past year, consumer spending grew at a very fast 2.7% per year, and it may have topped that mark in the third quarter, which just finished.
Economists say it’s a bit surprising how little higher interest rates have stopped most Americans.
Before the Fed began to raise interest rates on loans in 2022, millions of people had already locked in low mortgage rates or bought cars with no interest. They’ve also been spending less on things and more on services that don’t change based on interest rates, like going out to eat or traveling.
“The economy doesn’t care about interest rates as much as it used to,” Compernolle said.
High government spending has also helped the U.S. economy grow recently, though not as much as other factors. Since the rush of pandemic aid stopped, spending has slowed down, but Washington is still running deficits that are higher than ever before.
Omodunbi said, “Government spending is one reason why we’ve seen pretty good economic growth.”
Both candidates for president have offered a lot of spending plans or tax breaks for next year if they win. This means that the government won’t be shutting down any time soon, no matter what the long-term effects are.
