Strong Q3 but higher interest rates may finally begin to bite
The three-month average for job growth in August was the lowest since summer 2020 as the labor market slowly eases. Still, wage gains are strong in many industries, supporting consumer spending power and adding to services inflation. Even with these income gains, the consumer sector may be running out of steam with rising costs and higher interest rates forcing more households to tap into savings or take on additional debt. Against this backdrop, the FOMC decided to keep interest rates steady in September but is prepared to raise rates again later this year, if needed.
While economic growth in the third quarter was robust, headwinds for consumer and business activity are building for the fourth quarter. Interest rates continue to climb — further hurting the housing sector and business investment — while exhausted pandemic savings and renewed student loan payments should weigh on spending. These trends suggest a recession ahead for the economy rather than a soft landing. Still, the resiliency of hiring with many service industries should stave off recessionary conditions until early 2024 and an expected downturn is likely to be mild in nature.