Economic Commentary

Strong Q3 but higher interest rates may finally begin to bite

September 27, 2023
A professional checking their mobile device.

Consumers are rounding out a strong third quarter which should result in another acceleration for real GDP growth to an annualized pace above 4.0 percent. But the momentum for spending is waning in the face of even higher interest rates and lingering inflation, while job gains continue to weaken. Moreover, the resumption of student loan payments, a likely government shutdown, and ongoing auto strikes set the stage for a sharp growth slowdown in the fourth quarter. Still, the long-awaited recession should be delayed into early 2024 and we expect the downturn to be modest in length and severity with activity rebounding over the second half of next year. Monetary policy should remain restrictive well into 2024, a downside risk for a deeper recession should the lack of credit and worsening affordability cut into consumer and business activity more than expected.

Key Takeaways:

  • Job gains picked up in August, but the trend weakened further after sharp downward revisions to prior months. Wage growth has moderated, but continues to rise rapidly, indicative of ongoing tight labor conditions.
  • Sluggish core retail sales for August is evidence that consumers are reaching their spending limits, and analysis from the San Francisco Fed suggests excess pandemic-related savings have been fully spent.
  • Core CPI inflation was disappointingly strong in August, pulled up again by rising costs for housing and transportation services. Even when excluding housing, super core services inflation saw its largest increase since January — a worrying trend for the Fed.

Analysis of current conditions:

The three-month average for job growth in August was the lowest since summer 2020 as the labor market slowly eases. Still, wage gains are strong in many industries, supporting consumer spending power and adding to services inflation. Even with these income gains, the consumer sector may be running out of steam with rising costs and higher interest rates forcing more households to tap into savings or take on additional debt. Against this backdrop, the FOMC decided to keep interest rates steady in September but is prepared to raise rates again later this year, if needed.

Outlook for the months ahead:

While economic growth in the third quarter was robust, headwinds for consumer and business activity are building for the fourth quarter. Interest rates continue to climb — further hurting the housing sector and business investment — while exhausted pandemic savings and renewed student loan payments should weigh on spending. These trends suggest a recession ahead for the economy rather than a soft landing. Still, the resiliency of hiring with many service industries should stave off recessionary conditions until early 2024 and an expected downturn is likely to be mild in nature.

Current and future dials and scorecards of September 2023.

Monthly dashboard of September 2023.


  • The information in this report is provided by Nationwide Economics and is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person.

    The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness.

    Nationwide, the Nationwide N and Eagle, and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2023 Nationwide.