According to Mohamed El-Erian, the latest United States GDP data indicate that the economy is still strong, but this does not mean that the United States economy is out of trouble.
The most recent data show that the United States has an annualized ring increase of 4.9 per cent over the first estimated real gross domestic product (GDP) in the third quarter, more than double the 2.1 per cent in the second quarter, the highest since the fourth quarter of 2021 (7.0 per cent), and that the market was originally expected to rise to 4.3 per cent.
According to Elian, while this is a sign of economic strength, it is not yet time to emerge from recessionary anxiety.
In a programme he said, “We should not see this as a sign of the end of everything in 2024. As you know, I have always opposed the idea that we will have a recession in 2023, and I am a little worried about 2024.”
The rising deficit and increasing bankruptcy in the United States, as well as the inflation rate of nearly 4 per cent, were worrying. However, strong retail sales data and employment reports in September led many investors to shift to “no recession”.
Elian said that, while GDP data emphasized the “exceptionism” of the United States, high interest rates were affecting all corners of the economy, which required attention.
He said, “First, the decline in savings is a major problem. Second, the situation in the interest rate market is indeed problematic. This is a problem for business, for government, for the Fed, and for families. This is a major disadvantage for economic activity.”
He explained that, more than a decade after the 2008 financial crisis, borrowing costs had remained close to zero, boosting economic activity by encouraging loans and maintaining market liquidity, which had helped to raise asset prices.
Now, the Fed's interest rate hike has raised the cost of credit for the economy as a whole, and the market has responded to this change. Mortgage interest rates have exceeded decades of highs, commercial real estate markets are shaking and the Government will have to pay more interest to pay its huge debt.
Another reaction to the current Fed interest rate hike was the collapse of the bond market, described by Eleanor as “no anchor”. As interest rates are expected to remain high in the foreseeable future, the bond market has seen historic sales in recent months. This week, for the first time since 2007, the 10-year United States Treasury debt return has exceeded 5 per cent.