US economy soars as consumers fend off Federal Reserve's interest rates

America's economy still faces an uncertain future as it braces for more headwinds

The New York Stock Exchange. AFP

The US economy soared in the third quarter this year as consumer spending remains strong as the Federal Reserve tries to tamp down on spending with its high interest rates.

Gross domestic product grew at an annualised rate of 4.9 per cent from July to September, sharply up from 2.1 per cent in the previous quarter, a preliminary estimate from the Commerce Department showed.

GDP was expected to grow at a 4.7 per cent annual pace in the third quarter, a Wall Street Journal survey of economists said.

The Commerce Department said third-quarter growth "reflected accelerations in consumer spending, private inventory investment, and federal government spending and upturns in exports and residential fixed investment".

President Joe Biden credited his economic agenda - which he calls "Bidenomics" - for the strong economic activity.

"It is a testament to the resilience of American consumers and American workers," he said.

Even with strong economic growth, he remains hamstrung by consumers who still feel the pinch of inflation, which has fallen to 3.7 per cent since a peak of 9.1 per cent last year.

In response to high inflation, the Fed has been on an aggressive campaign in raising interest rates to cool spending and thus rising prices.

Interest rates have been raised to 5.4 per cent - a 22-year high - from a near-zero level in March 2022.

So far, consumers have been able to fend off those rate increases due to a strong labour market.

Even with a strong quarter, the US economy still faces an uncertain future due to multiple headwinds. That includes the continued effects of interest rates, record-high mortgage rates, the UAW strike, resumption of student loans and the Israel-Gaza war.

Interest rates and long-term Treasury yields are anticipated to dampen growth next quarter, meaning that the July-September period could be the strongest quarter for growth before economic growth cools.

The Fed has projected the US GDP to grow at a 2.1 per cent rate this year, according to estimates released in September.