Economist says high interest rates could slow US growth

Over the past 12 months, the U.S. economy’s nominal growth has been trending downward. But at 6.3%, it’s still growing at a faster pace than the average of 4.5% over the past 26 years, according to Bloomberg statistics.

With the Federal Reserve expected to hold interest rates steady Oct. 28 after a September increase, economist Scott Colbert has been explaining why and what could happen next. Keeping interest rates higher should help stall inflation, Colbert said, but it also could stall growth.

“They won’t raise rates,” Colbert said. “They’re going to use this as a chance to assess whether their first rate hike was a slight tightening of economic conditions.

“Twelve months from now, growth isn’t going to be 6.3%. It’s going to be less. Nominal growth is going to decline. It will slow, because these higher interest rates will translate to slower economic activity.”

Colbert also has been distilling a 32-page booklet full of data, presenting it to small groups of what he called “high-net-worth individuals” who do their banking at FineMark Bank & Trust across Southwest Florida. He has been meeting with groups at the area’s four FineMark branches Oct. 26-29.

When the Fort Myers-headquartered bank merged with Commerce Bank in January, it gave FineMark access to the resources employed by the 69th-largest bank in the nation in terms of assets.

Those resources include Colbert, Commerce Trust’s executive vice president, chief economist and director of fixed income management.

Construction of data centers across the country to support artificial intelligence and what Colbert called the “Wealth Effect” have helped bolster the economy, keeping it from what otherwise could have been a steeper skid, he said, six years after the swift economic crash caused by COVID-19 in 2020.

“I think when you’re dealing with the high-net-worth community in Southwest Florida, they’re all happy, because they’re all in the stock market,” Colbert said. “We’ve been averaging 4.5% since 2000. Where is the extra coming from? You’ve got whatever is going on with AI and data centers and Nvidia chips.

“The second part is what people don’t talk about is the ‘Wealth Effect.’”

Colbert noted that during his presentations this week, he has been facing some of the people responsible for upholding the economy.

“People 65 and older have 65% of the wealth in this country,” Colbert said. “Older folks had a chance to buy houses when they were cheap, and they had a chance to buy index stocks when they were cheap. Those are the two key drivers that are keeping the economy moving at a faster pace than would be typical.”

In 2022, when businesses began returning to normal following the pandemic, economists kept talking about whether raising interest rates would calm inflation without causing a recession. They were talking about a “soft landing.”

In retrospect, Colbert said, the plane still hasn’t landed.

“You don’t have hard landings or soft landings if you’re growing at a 6.3% pace,” Colbert said. “We’re flying 30% to 40% faster than we normally do. The stock market’s up over 100% since the start of 2023.”

There are eight corporations — Colbert, for fun, has taken to calling them either the Elite Eight or the Eight Mafia companies — that have been doing their job to prop up the economy. They are Amazon, Apple, Google, Meta, Microsoft, Nvidia, Oracle and Tesla.

“It’s trickling down to the rest of the country,” Colbert said. “They used to hoard their money. Now, they’ve stopped the stock buyback. They’re spending it instead. Instead of hiding it under mattresses, they’re letting it fly.”

If comparing a modern economic cycle — typically nine to 11 years — to a Tom Cruise movie, look out, Colbert said. We’re not even to the middle of the movie, which was roughly when Goose died in Top Gun and when the Jon Hamm character benched Cruise’s character in the sequel, Top Gun: Maverick. The economy likely would face turbulence in 2027, he said, but by how much remains to be seen.

“The economy is susceptible,” Colbert said. “When it turns, it turns because the AI buildout is slowing. That will impact corporate profitability. That’s when you start to fire people. When the stock market stops growing, that’s when the ‘Wealth Effect’ stalls. It starts when the Fed pushes back on inflation. Those interest rates tend to bite. When you try to get inflation under control, that’s when it starts to tip and tilt.”

Signs of an imminent economic slowdown, Colbert said, are a slowdown in data center buildout and a falling stock market.

“The portfolio goes down, all of a sudden people stop buying those Range Rovers,” Colbert said.