Gross domestic product, or GDP, was recently released, and as expected, U.S. economic growth was very strong in the third quarter of this year.

If we annualize the growth in Q3, the U.S. economy would expand at 4.9% over the course of the year (hence “annualized”). Another way to look at quarterly data is to simply compare Q3 of this year to Q3 of last year, and that growth rate was 2.9%.

I think that year-over-year analysis is more accurate than the annualized one. Just because one quarter has unusually high or low growth, that doesn’t mean that level of activity will hold for an entire year, which is what the annualized metric states. The year-over-year growth of 2.9% is still, however, above “trend” growth we’ve seen in the U.S. economy over the past many decades (roughly 2%).

In the second quarter of this year, economic growth was more in line with “trend” growth at 2.1%. The outsized economic performance in the third  quarter was mostly due to relentless increases in consumer spending (up 4%), private inventory investment, exports, all levels of government spending and residential investment.

It’s worth noting that the largest component of personal consumption expenditures was in the services category. Most experts say this summer/early fall bump was part of the last hurrah of consumers who are enjoying full normalcy after the pandemic, are confident about their employment, are spending what’s left of their “excess” savings, and indeed are relying more on credit cards to finance expenditures.

There is a reality check around the corner with savings rates that continue to dwindle (now at 3.4% versus 7.2% in January 2020).

Undoubtedly, a portion of the bump in use of credit cards is also due to significantly higher price levels that lower-income individuals, in particular, are struggling with. Lower-income households report they are using credit card more just to cover necessities, and that’s a bit of a red flag for me as I watch credit card delinquencies rise.

Goods purchases did not increase as much as services, but still had a nice increase in Q3 after lackluster Q2 levels. Subtractions on GDP in Q3 included nonresidential investment and (more) imports.

Despite the robust GDP read, consumers, businesses and most economists remain skeptical about the U.S. ability to keep up with longer-term trend growth rates of more than 2%.

Remember that GDP is a backward-looking indicator with Q3 representing July to September; so to speculate how the remainder of this year and next might look, we have to focus on leading indicators. If we do that, a list of headwinds remains.

We have improving but still sticky inflation that stayed at 3.7% in August and September, mostly due to shelter and gasoline costs. While the Federal Reserve did not raise interest rates last week, it might keep them higher for longer, which crimps homebuying and business investment.

It’s somewhat technical, but the “real” interest rate is also a factor here because as inflation declines and interest rates stay high, the “real” interest rate is greater, and that disincentivizes borrowing and investing, which hurts future growth.

The high “real” interest rate is part of the reason U.S. Treasurys (e.g., bills, notes, and bonds) have been more attractive to investors compared to stock market investments. This, alongside general economic uncertainty, translates to investor skittishness and stock market volatility.

At a household level, the dissipating pandemic savings, rising debt (with increasing credit card and auto loan delinquencies), lower government spending due to the (shutdown-averting) Fiscal Responsibility Act, general legislative paralysis and student loan repayments also factor into what will likely be reduced consumer and government spending in coming quarters, which all factor heavily into GDP.

Having said all that, retail sales do continue to hold up; two contributing factors include many people holding second jobs, which help finance continued spending, and many households who still have decent discretionary income because they locked in sub-3%, 30-year mortgage rates a couple of years ago.

The narrative that the strong labor market will likely keep an economic slowdown or technical recession from being severe has not changed. Job openings had an upside surprise in the latest August data (9.6 million openings), and we also had a 336,000 increase in employment across a plethora of industries in September, according to the BLS report.

The increase in employment is more than double the pre-pandemic average and helps explain the national and local declines in unemployment in September. The U.S. rate fell from 3.9% in August to 3.6% in September, and the El Paso County rate fell from 3.8% to 3.4% over the same period.

Another factor in the U.S. economic resilience this year is the simple fact that the U.S. dollar is the world’s reserve currency. This means the demand for U.S. Treasurys will remain relatively strong, which enables the U.S. to finance its expenditures as well as its (ever-growing) debt.

But the relatively resilient position of the U.S. could be thrown into question by external factors. Serious geopolitical risks, more recently the Israeli-Palestinian crisis, the Ukrainian crisis and other global challenges pose the largest threats to both global economic stability and inflation.

Commodity prices for staples like oil and wheat are at particular risk. These and other exogenous risks could debunk the assumption of a mild downturn in the U.S. and consumers are aware of this. Consumer sentiment fell in October with an index at 63.8 from the University of Michigan.

Some of the decline was driven by higher-income consumers with stock market investments. Stock market volatility has been high and returns in 2022 and thus far into 2023 are paltry compared to the two previous (pandemic) years.

And wealthy people have taken note. Overall, one-year-ahead expected personal finances declined by about 8% and one-year-ahead expected business conditions declined by 16%. Higher expected inflation largely explains households’ and businesses’ deteriorating outlook.

I’d like to shift focus a bit to some of the recent demographic data that’s been updated by our various state and national sources. The Federal Poverty Level (FPL) in the U.S. increased significantly in 2022 for individuals (from $12,880 in 2021 to $18,310 in 2022), although not quite as significantly for families of four ($26,500 in 2021 to $27,750 in 2022).

The increases, of course, correlate with the elevated inflation levels we’ve had over the past couple of years. It’s helpful to juxtapose the FPL to the MIT Living Wage for El Paso County shown in the economic dashboard, because the MIT data represents what individuals and families need to earn to cover necessary expenses.

For a family of four with two children and two working adults (each making $55,619), the necessary household income to cover all expenses is $111,238. This is approximately four times the FPL.

A piece of good news is that the percentage of people in the U.S. at or below the FPL went down slightly (from 12.8% in 2021 to 12.6% in 2022). El Paso County had a larger reduction in the percentage of people at or below the FPL (from 9.6% in 2021 to 8.3% in 2022).

The improvements are likely tied to the increases in average wages from $61,984 in 2022 to $65,572 in Q1 of this year (up 5.8%). However, the U.S. average wage increased more so, going from $69,992 in 2022 to $76,180 in Q1 of this year (up 8.8%).

I don’t likely have to tell you that wages didn’t keep pace with inflation for most of the pandemic era, but the aspect of this that’s worrisome is that locally our wages are still 13.9% below the U.S. average wage and 19.1% below Colorado average wages.

Meanwhile, our cost-of-living Index (COLI) did slightly improve in Q2 of this year to 107.2% of the U.S. average from 108.5% in Q1, mostly because housing prices have moderated. But the reality now of a local cost of living at 107.2% of the U.S. average with wages 13.9% below the U.S. is not a good scenario. Shelter is a large component of cost of living, so that is one of the linchpins in bringing parity between cost of living and wages.

In years past, I tempered my concerns about local wages lagging mostly because of the retired military who perhaps take lower wages in private-sector jobs because they have government pensions and benefits. Military spouses also often move around a lot and that lack of continuity can be a drag on wages.

However, as I’ve watched professional and technical jobs increase significantly, I am no longer convinced that our wages shouldn’t be more on par with U.S. average wages since professional jobs are usually six figures.

There is a mismatch, and until wages “catch up,” I believe we are going to have to double down on affordable housing to keep our workers and attract new ones.

We also now have updated educational attainment levels for 2022. For a bachelor’s degree or higher, the U.S. increased from 12.8% in 2021 to 13.4% in 2022 (ages 18-24) and from 35% to 35.7% for ages 25 and up.

Interestingly, the comparable metrics for the city of Colorado Springs increased much more so from 12% to 17.4% for ages 18-24, and more modestly from 42.8% to 43.8% for ages 25 and up. The increased proportion of educated individuals locally is in line with the increases I’ve been seeing in new professional/technical establishments as people often move here for jobs.

The U.S. and local share of the population with some associate’s or other college degree stayed roughly the same from 2021 to 2022. One thing to keep in mind, however, is that community/state colleges (such as Pikes Peak State College) are increasingly used by companies and individuals for relatively short-term training and/or certification. This reflects the changing needs of businesses that quickly want to upskill their workers as well as the shift of many businesses to not require bachelor’s degrees.

Many businesses today are focusing more on “skills-based training.” Those one-off courses are not always captured in the data but represent an important part of the new workforce training paradigm.

Tatiana Bailey

CHART: Stock Market – Historic S&P 500