Intelligent Investment

Economic Watch: Fed Still Unlikely to Boost Rates Despite Strong Q3 GDP Growth

October 26, 2023 2 Minute Read

Content-Team-Only-image13

Executive Summary

  • U.S. GDP increased by 4.9% on an annualized basis in Q3, exceeding expectations of 4.7%.
  • Although this strong growth complicates the fight against inflation, we continue to believe that the Fed is done hiking interest rates.
  • CBRE expects that economic growth will slow in the fourth quarter and remain sluggish next year. The rapid rise of long-term interest rates will significantly restrain growth.
  • Volatility in the bond market, particularly the rapid rise in 10-year Treasury yields, has caused us to downgrade our forecast for commercial real estate investment volumes, though we expect some recovery in the second half of 2024. Meanwhile, leasing activity should remain relatively resilient.

Q3 2023 GDP

Robust consumer spending on both goods and services was primarily responsible for the 4.9% GDP growth in Q3, with personal consumption expenditures growing by 4.0% annualized. Inventories, exports, residential investment and government spending also were strong contributors. Business investment was mixed: Equipment purchases fell, while spending grew on structures and intellectual property products like software. Residential investment remained a net contributor to growth even as mortgage rates hit multi-decade highs amid a single-family housing shortage.

CBRE Forecast

CBRE expects that the Fed will not raise interest rates again despite today’s strong GDP reading. The rapid rise in 10-year Treasury yields represents a significant tightening of financial conditions. High energy prices, heightened geopolitical risks, diminished savings, the restart of student loan payments, a potential government shutdown and the continuing autoworkers strike are all headwinds for economic growth. As such, we expect growth will significantly slow in Q4 and remain sluggish in early 2024, helping cool inflation and keeping the Fed from raising rates.

Strong Q3 GDP growth will support commercial leasing activity, which we expect will remain relatively resilient heading into 2024. However, the increase in long-term interest rates has materially changed our forecast for investment volumes. We now expect that investment activity will not pick up until the second half of 2024.

Figure 1: CBRE House View

economic-watch-fed-still-unlikely-to-boost-rates-despite-strong-q3-gdp-growth-fig-1

Related Insights