Are Rising Interest Rates Already Weighing on the Economy?

Are Rising Interest Rates Already Weighing on the Economy?


This warning from Capital Economics caught our attention: “With the fiscal stimulus acting as a strong tailwind, economic growth has been unusually strong over the past few months but, below the surface, signs are emerging that rising interest rates have begun to weigh on some parts of the economy.”

Capital Economics’ chief U.S. economist, Paul Ashworth, notes that inflation-adjusted interest rates are still low by historical standards and that the rise in borrowing costs for businesses has been modest so far. But “[households are getting squeezed a little more,” he writes, “with the 30-year fixed mortgage rate at a seven-year high. Interest rates on credit cards, personal loans and car loans have also been rising to new highs.” And the housing market seems to have cooled significantly as a result of higher rates. “Both new and existing home sales peaked around mid-2017 and now appear to be on a downward trend,” Ashworth says. “House prices are still rising, but the pace of appreciation has slowed.”

On the business side, though, investment looks to be holding up better “probably because of the effects of the sharp drop in corporate taxes earlier this year and the fact that corporate borrowing costs, measured by bond yields, have not risen by as much over the past 12 months.”

The bottom line: Economic growth is likely to cool off a bit. “Overall, the signs are there that higher interest rates are beginning to weigh on rate-sensitive activity,” Ashworth writes. “But that does not mean overall economic growth is about to slump. The fiscal stimulus is still providing a much bigger boost to activity. Next year, however, as that stimulus begins to wane and the monetary tightening becomes more pronounced, we do expect GDP growth to slow more markedly to 2.0%, with the risk of an even more severe slowdown in 2020.”