As we approach the close of 2023, the U.S. economy faces a mix of challenges and positive indicators. In episode 34 of the Market Pulse podcast, I sat down with David Fieldhouse, Director of Consumer Credit Analytics at Moody's Analytics, to discuss the factors influencing the economy, the impact of recent events, and what businesses and consumers can expect in the coming months.

Listen to the full interview or continue reading a summary below.

Given the current economic performance, what factors are contributing to the intensifying headwinds as we approach the end of the year? And how significant are the factors contributing to the intensifying headwinds as we approach the end of the year?

David Fieldhouse: As the year draws to a close, the economy faces challenges despite the impressive performance we saw in the third quarter. While no single factor alone could cause the economy to falter, the combined impact of various issues could lead to a downfall. So, we want to think about issues related to things like the student loan payment moratorium coming to an end or higher interest rates.

How significant is the impact of the end of the student loan payment moratorium and the surge in long-term interest rates?

David Fieldhouse: We're seeing the impact of the end of student loan payment moratorium right now. It is expected to impact around 24 million borrowers, with an annual increase of over $85 billion in payments. President Biden's executive order has instructed student loan services not to report delinquent borrowers to credit bureaus. As a result, borrowers will prioritize their other obligations before paying back their student loans. So, not all borrowers will resume payments immediately, and some may opt for income-driven repayment plans. 

The surge in long-term interest rates is anticipated to significantly impact various sectors, particularly the housing sector, but the end of this surge could potentially alleviate some of the negative impacts.

With a potential 10-year treasury yield of 5% being unsustainable, why is a yield closer to 4% more likely by year's end, and how would this affect the overall economic outlook?

David Fieldhouse: The 5% rate for a 10-year treasury yield is driven by higher expected short-term rates and an increased term premium. A yield closer to 4% is deemed more likely by year-end, balancing the need for higher returns and the expectation that the Federal Reserve will maintain a cautious approach. The overall economic outlook would depend on how well the economy can absorb this rate. If businesses and households can maintain higher borrowing costs, the impact on the economy should be limited.

Can you break down the estimated 1.35 percentage points annualized hit to real GDP in the fourth quarter? How do factors like the UAW strike, potential government shutdown, higher oil prices, or the surge in long-term interest rates contribute to this?

David Fieldhouse: The estimated hit to real GDP in the fourth quarter is broken down into components, with the end of the student loan payment moratorium and the UAW strike being the two significant contributors. Other factors like a potential government shutdown, higher oil prices, and the surge in long-term interest rates also play a role in this economic impact.

Despite these economic headwinds, the real GDP in the quarter is expected to be just barely positive and near 1% in the first quarter of 2024. How can the economy maintain resilience amidst these challenges?

David Fieldhouse: There is optimism about the economy's resilience, driven by high growth in the previous quarter, moderating inflation, and improvements in supply. Excess savings among consumers, typically older and more affluent individuals, and the potential for continued spending may contribute to maintaining resilience. However, concerns about oil prices, government shutdowns, and a return of higher interest rates are acknowledged as realistic challenges.

Shifting gears a bit to close out on a positive note, what about bright spots, what can we look forward to, and what are your recommendations for businesses and consumers for next year?

Bright spots include the recovery of construction and vehicle-producing industries. Recommendations for businesses include preparation for potential economic slowdowns, focusing on financial stability, and improving efficiency. Consumers are encouraged to save, invest wisely, and make prudent credit decisions amid lingering uncertainties.

More Market Pulse Resources

Be sure to check out other episodes of the Market Pulse podcast, and register for our upcoming Market Pulse webinar where we help customers navigate through the current economic situation.