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US economic growth continues, fuelled by dwindling savings, says Fed

WASHINGTON – The United States economy saw modest growth over the summer as consumers kept the wheels turning by dipping into rapidly diminishing savings to finance tourism spending, the US Federal Reserve said on Wednesday.

The US economy has shown signs of resiliency in recent months despite an aggressive campaign of interest rate hikes by the Fed to tackle high inflation.

A recent spurt of good economic news has led analysts to cut the likelihood of the world’s biggest economy entering a recession in 2023, while keeping pressure on the Fed as it battles inflation through rate increases.

Analysts and traders broadly expect the central bank to hold interest rates steady in September amid signs of a slowdown in new job creation and an uptick in unemployment.

In its regular report on economic conditions known as the “beige book”, the Fed indicated that the positive economic news could soon come to an end, along with consumer savings accumulated during the pandemic.

“Contacts from most districts indicated economic growth was modest during July and August,” the Fed said on Wednesday, in contrast to its previous report noting only slightly increasing growth.

“Consumer spending on tourism was stronger than expected, surging during what most contacts considered the last stage of pent-up demand for leisure travel from the pandemic era,” the Fed added.

Spending on tourism helped balance out a slowdown in other non-essential retail spending, as some Fed districts suggested that consumers may have exhausted their savings and are relying more on borrowing.

Most districts noted a rise in loan balances, while some also flagged a worrying increase in delinquencies on consumer loans, indicating that many consumers are running into challenges making repayments.

This situation is likely to be exacerbated by the return of student loan repayments in October after a 3½-year pause.

In New York, contacts noted some concern that the resumption of student loan payments in October will make it even more difficult for some to afford purchasing a home, the Fed said.

The report found that job growth was subdued across the nation, with many contacts suggesting wage growth would slow in the second half of 2023.

Meanwhile, inflation slowed overall, decelerating faster in manufacturing and consumer goods sectors. AFP

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