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The housing market is rapidly losing momentum. Interest rates continue to rise. The stock market remains volatile. And inflation continues to be a big problem for people trying to pay their bills.
Given all of this, one might think Thursday’s de facto economic report for the third quarter – gross domestic product, or GDP – will be grim.
But here’s the thing.
Economists are indeed forecasting decent, if not spectacular, growth. The consensus forecast from economists polled by Reuters is that GDP grew 2.1% on an annualized basis in the third quarter. (This will be the first estimate for Q3 GDP and there will be multiple revisions in the coming weeks.)
There’s an even rosier forecast from the Federal Reserve Bank of Atlanta, whose well-respected GDPNow model tracks the latest economic data and forecasts GDP. The latest GDPNow measurement calls for annualized growth of 2.9%.
Despite all the gloomy news, why so rosy? For one thing, a large part of GDP is consumer spending – and while we all complain about inflation, rising prices haven’t stopped consumers from spending. Retail sales rose 8.2% year-on-year in September, according to the government.
It also helps that the job market is still healthy. American businesses are creating hundreds of thousands of jobs every month, the unemployment rate is at a nearly half-century low of 3.5%, and wages are rising (though not as fast as prices).
If GDP expands anywhere between 2% and 3% – instead of contracting as it did in Q1 and Q2 – it means we’re less likely to be in a recession. That would be welcome news for consumers, investors, and the Federal Reserve.
It also means that the Fed is likely to continue raising interest rates sharply in a bid to finally stifle inflation once and for all. Yes, that increases the likelihood of a subsequent recession, as rate hikes take time to impact most parts of the real economy, with mortgage rates and housing being the notable exception.
“The Fed risks triggering a US recession with its interest rate Price increases, but the bigger risk is an economy at the mercy of rising prices,” ADP chief economist Nela Richardson said in a report. She argued that inflation could nominally boost growth as consumers spend more… but it comes at a price. It eats away at workers’ paychecks.
Barring a strong Q3 report, however, some economists are concerned about slowing growth going forward.
“The threat of GDP damage from higher interest rates and a stronger dollar is enormous,” Jeffries economists Aneta Markowska and Thomas Simons said in a report. They compared the current Fed tightening and its aftermath to when the Fed aggressively hiked rates to fight inflation in the early 1980s under then-Fed Chairman Paul Volcker.
These rate hikes helped trigger what is known as a double-dip recession, in which the economy suffered two downturns between 1980 and 1982.
Markowska and Simons are also concerned that the Fed is so focused on inflation that it will not act quickly enough to cut rates again once the economy shows sustained signs of slowing.
“We also expect the Fed to be slow to respond to economic weakness, which is likely to prolong the next recession and worsen its severity,” they said, adding that they don’t think the Fed will cut rates until early 2024 … even if it is a recession could start in the third quarter of 2023.
In other words, the hoped-for “soft landing” of the economy could turn out to be a pipe dream.
“An economic downturn is likely in 2023 as a soft landing is generally difficult to achieve. Achieving a soft landing with inflation above 8 percent will prove even more difficult,” said José Torres, senior economist at Interactive Brokers, in a report.
“This recession may require the Fed to stay on the brakes longer,” he added. “Tackling high inflation while maintaining positive economic growth is a challenging ordeal.”
The bottom line: So the good news is that the economy is unlikely to be in a recession just yet… and third-quarter GDP should support that view. The problem is that a downturn is likely to come sometime in 2023.
The gains have helped support the stock market so far this month. But a sector that usually performs best, technology, is unlikely to please investors.
The results from social media company Snapchat (SNAP), which gave a bleak outlook, were not encouraging. And as CNN Business’s Clare Duffy points out, the upcoming earnings from companies like Apple (AAPL), Amazon (AMZN), Google-owner Alphabet (GOOGL), Microsoft (MSFT), and Facebook parent Meta may not be all that promising either .
The slowdown in online advertising will hurt several of these companies, most notably Meta and Alphabet, which includes YouTube. The strength of the dollar will also eat away at all of their international sales and profits.
Hopes remain that these tech titans will have a rosier outlook for the fourth quarter. After all, tech usually shines during the holidays when consumers splurge on gadgets.
But with inflation taking a toll on household budgets, it remains to be seen how many new iPhones, Pixels, Xboxes and Quest VR headsets will show up in those smiley Amazon boxes this December.
Monday: Flash UK and Eurozone PMI; Hyundai, Philips (PHG) and Discover (DFS) earnings
Tuesday: US Consumer Confidence; Revenues from GM (GM), GE (GE), UPS (UPS), Coca-Cola (KO), UBS (UBS), HSBC (HSBC), SAP (SAP), JetBlue (JBLU), Alphabet, Microsoft, Visa ( V), Texas Instruments (TXN), Spotify (SPOT), Chipotle (CMG) and Mattel (MAT)
Wednesday: Sale of new homes in the USA; Revenues from Boeing (BA), Bristol-Myers (BMY), Barclays (BCS), Heineken (HEINY), Deutsche Bank (DB), General Dynamics (GD), Kraft Heinz (KHC), Norfolk Southern (NSC), Hilton ( HLT), Harley-Davidson (HOG), Ford (F) and Meta
Thursday: US GDP; ECB interest rate decision; Industrial production in China; Weekly Unemployment Claims in US; US durables; Earnings from Comcast (CMCSA), Samsung (SSNLF), Unilever (UL), Credit Suisse (CS), Anheuser-Busch InBev (BUD), Caterpillar (CAT), Merck (MRK), Southwest (LUV), McDonald’s (MCD) , Mastercard (MA), Amazon, Apple, Intel (INTC), T-Mobile (TMUS) and Capital One (COF)
Friday: Personal Income and Expenditure in USA; US PCE inflation; Bank of Japan rate decision; France and Spain GDP; Earnings from Exxon Mobil (XOM), Chevron (CVX), Volkswagen (VLKAF), AbbVie (ABBV), Charter Communications (CHTR) and Colgate-Palmolive (CL)
