Americans continued their revenge spending in the third quarter despite persistent inflation and rising interest rates, helping the U.S. economy grow at its fastest pace since late 2021.

Real gross domestic product (GDP) grew at a 4.9% annual rate last quarter, according to the so-called advance estimate that the Bureau of Labor Statistics (BLS) reported Thursday. That’s up from just 2.1% in the second quarter. The latest figure was buoyed by rising federal and state government spending, increased exports, and inventory investments from businesses, the BLS explained.

The Biden administration was quick to celebrate the surge in U.S. economic growth after years of consistent recession predictions from Wall Street. Ever since inflation surged to a four-decade high of over 9% in June 2022, a chorus of experts has repeatedly warned that the Federal Reserve may need to hike interest rates until the economy slips into recession if it truly wants to restore price stability for consumers. But President Biden rebuked that thinking on Thursday.

“I never believed we would need a recession to bring inflation down—and today we saw again that the American economy continues to grow even as inflation has come down,” he said in a statement. “It is a testament to the resilience of American consumers and American workers, supported by Bidenomics—my plan to grow the economy by growing the middle class.”

A big surprise on Wall Street

The latest surge in GDP surprised many economists and Wall Street analysts who still fear rising interest rates and stubborn inflation could spark a recession. Some even argued Thursday the latest GDP report was merely the last hurrah of a slowing economy.

“Take a good look at the estimate for third-quarter GDP because it could be the highest that we see for a while,” Mark Hamrick, a senior economic analyst at Bankrate, said.

Hamrick noted the economy still faces “substantial headwinds,” including the Federal Reserve’s “higher for longer” interest rate policy, surging Treasury yields, and the potential for a partial federal government shutdown in November due to gridlock in Washington over the federal budget. On top of that, the threat of geopolitical instability is rising as the Russia-Ukraine and Israel-Hamas conflicts continue.

“Expectations are muted for the intermediate term amid no shortage of sources of uncertainty,” Hamrick said of the economy. “There’s no guarantee that recent substantial momentum can be sustained.”

Olu Sonola, head of U.S. economics at Fitch Ratings, argued the GDP numbers were evidence that economic growth “transitioned from resilience to reacceleration” in the third quarter, defying the Fed’s aggressive interest rate hikes. But she warned that the economy’s current strength won’t make the Fed’s inflation-fighting job any easier, and Chair Jerome Powell is likely to end the economic-growth winning streak soon by raising rates and keeping them elevated.

“The Fed’s higher for longer message may turn out to be much higher for much longer,” she warned. “The bottom line is that the staying power of this growth spurt is questionable going forward; above-trend economic growth cannot sustainably coexist alongside an increasingly restrictive interest rate environment.”

Don’t get too excited, economists say

A number of economists were quick to share words of warning after the GDP report on Thursday, despite its strength. Even though consumer spending rose at a 4% annual rate last quarter, marking the largest increase since the fourth quarter of 2021, Jeffrey Roach, chief economist at LPL Financial, argued that it’s a last gasp from consumers. “The real question is if the trend can continue in the coming quarters, and we think not,” he said.

Americans headed to Taylor Swift concerts and movies like Barbie and Oppenheimer in droves this summer, supported by the strong labor market and excess savings built up during the pandemic. But as those savings run dry and the labor market cools under the weight of rising interest rates, Roach believes that consumers will “wind down their spending splurge.”

He also noted that corporate investment for equipment shrank in the third quarter, evidence that rising rates have “put a strain on businesses.” And he explained that the third-quarter GDP numbers were boosted 1.3 percentage points by businesses rebuilding their inventories—a trend that is unlikely to continue “given the nature of inventory management.”

Morgan Stanley’s chief U.S. economist Ellen Zentner backed up those comments in a Thursday note, arguing that GDP growth will slow in the coming quarters owing to a “drag from inventory drawdown” after the third-quarter numbers were given a “boost” from inventory rebuilding. Her team is currently tracking fourth-quarter GDP at just 0.7%.

“We expect to see significant slowing into the end of the year, with the cumulative effect of tighter monetary policy and tightening financial conditions,” Zentner wrote.

A mostly bearish outlook

EY chief economist Gregory Daco also fears the good times won’t last after the strong third-quarter GDP report.

“While these signs of economic strength will fuel speculations that the economy is reaccelerating, we do not expect such strong momentum will be sustained,” he said Thursday. “Cost fatigue, rising debt servicing costs, and slowing job growth are about to be felt more widely by consumers and businesses.”

Still, not every expert was bearish. Jamie Cox, managing partner for Harris Financial Group, said the third-quarter GDP report shows that rising interest rates may not be as deadly for the economy, or stocks, as previously anticipated.

“Investors think ZIRP [zero interest rate policy] is the only condition which permits the economy to grow, and that is clearly an incorrect assumption,” he said. “In the U.S. so far, interest rates have accomplished the objective of stifling inflation, but not at the expense of economic growth or employment.”