Economic growth is strong. Why and what happens?

The views and opinions expressed are solely those of the author.

The Office of Economic Analysis recently announced that GDP growth in the fourth quarter of last year was 3.3%. This meant that throughout 2023 economic growth was 2.5%. This is strong growth and exceeds the 1.9% growth in 2022. What is driving this growth?

Most of the growth was due to increased government spending and higher-than-expected consumer spending, which accounts for around 70% of GDP. The increase in public spending occurred at both the federal and state levels.

The federal government increased spending by about $500 billion while states spent money given to them mostly by the American Rescue Plan and other spending approved early in Biden's presidency.

The strong consumer spending is somewhat disconcerting. In 2020 and 2021, the federal government gave free stimulus money to all consumers. The average family of four received $11,400 in free money, whether or not they were adversely affected by the COVID shutdown. And then they were given more childcare credits. Most of this money was saved initially.

By early 2023, consumers had taken all that money out of their savings and spent it. However, consumers continued to spend. In July 2023, total consumer credit card debt topped $1 trillion for the first time. It has grown since then.

Consumers' personal savings rate is usually around 5% of total income. During the free money deliveries, the savings rate reached 10%. Today the savings rate is just over 3%.

Consumers were used to spending the money they got from the stimulus packages. Today, with all that money, consumers continue to spend both by saving less and by using their credit cards. Consumer confidence, however, is rising.

Some have argued that the reason consumers are overusing their credit is that they want to maintain their lifestyle while paying significantly higher prices. On average, prices have risen nearly 20% since January 2021. Because consumers' incomes haven't increased by 20%, they have to use their savings and credit to maintain their lifestyles.

This explanation is probably outdated. Rather because consumers are spending so much, increased demand has contributed to higher inflation.

Economists have difficulty predicting what lies ahead. Many say that with the inflation rate falling, unemployment remaining below 4 percent, and incomes rising mostly due to large wage increases workers are receiving, economic growth should remain strong.

Another view that seems to make more sense is that even though the annual inflation rate fell to 3.1% in November, there is strong pressure that could push prices higher. The annual inflation rate rose to 3.4% in December.

While energy prices remain below their 2022 peak, these prices may rise soon due to geopolitical events in the Middle East. The annual core inflation rate, which holds food and energy prices constant, is still around 4%. If energy prices rise, the inflation rate will rise this year, rather than fall, as most forecasters predict.

The Fed is not likely to cut interest rates anytime soon, although many believe the Fed will cut rates this year, perhaps as soon as its March meeting. With rising inflation and strong economic growth, interest rate cuts will only fuel inflation.

The Biden administration expects economic growth of less than 2% for this year.

If inflation continues to rise, the Fed will not cut interest rates and may actually raise them once or twice in 2024. This will slow economic growth. The Fed expects a soft landing. But higher inflation and higher interest rates can help trigger a recession.

In addition, Congress must address the ever-increasing public debt that now exceeds $34 trillion. Despite high inflation, the federal government will run a $2.2 trillion deficit this year, adding to the public debt. Every president since Ronald Reagan has failed to address the growing public debt. They all kicked the can down the road and basically said they would let the next administration deal with it.

We are at the end of the road. We have to deal with the public debt now.

All of this means that economic growth will slow this year and may even turn negative.

Dr. Michael Busler, Ph.D. is a public policy analyst and professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics.

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