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An impending recession is the topic of the day. From Goldman Sachs to the IMF, analysts and economists seem to agree that the United States will see an economic downturn in early 2023. That’s why it’s so surprising that the US economy is expected to show robust growth in Thursday’s third-quarter GDP report.
But investors should be wary of a positive headline number. Economists warn the report could be a one-hit wonder that overestimated momentum in an economy that is actually slowing.
What is going on: According to Refinitiv, gross domestic product, a broad measure of economic activity, is estimated to have grown by 2.4% between July and September. That’s huge when you consider that we’ve just had six months of economic contraction.
That drop, coupled with continued inflation and rising interest rates, led many to believe the US was recession-bound. A quarter of growth isn’t necessarily going to change that, say economists who see this as less of a saving grace and more of a bump before the slump.
“Going forward, fourth quarter growth could turn negative and likely be very weak in the coming year,” David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a note Monday.
Mortgage rates have more than doubled since the beginning of the year. The US dollar is now up nearly 20% against a basket of its six closest counterparts. (Its strength could hurt US exports and US companies’ overseas profits, which could weaken growth.) The federal budget deficit, meanwhile, has halved, signaling reduced government spending.
“The U.S. economy is putting more braking force than will appear in the third quarter of the GDP report,” Kelly wrote.
Unless the United States goes through a deep recession and subsequent recovery, or the employment rate and productivity skyrocket suddenly, “there is little reason to expect explosive growth at any time in the coming years,” he added.
In addition, GDP is likely to increase in the third quarter as a result of a narrowing gap between exports and imports. But that’s because the United States imports fewer goods as demand dries up. If you lift the hood and look at the numbers, said Andrew Patterson, senior economist at Vanguard, you’ll see that American consumers and businesses are actually spending less. That’s a bad sign.
The numbers will also be supported by an increase in retailer inventory levels, which are beginning to recover from supply chain problems earlier this year.
What the Fed is looking for: Investors will analyze Thursday’s economic data for clues about the Fed’s rate decision at its policy meeting next week. Central bank officials will look at the underlying statistics in the report and likely ignore the headlines, Patterson said.
There are three categories in the report that the Fed will pay particular attention to, Paterson said. The first is whether companies are investing in their future growth by purchasing things like new machines. Next up is housing investment, which measures home construction and remodeling and signals a healthy housing market. The third is household consumption, a measure of how much money Americans spend on goods to meet their daily needs, such as food and clothing.
Paterson says he expects inflation-adjusted household consumption figures to have fallen. “They can be downright negative,” he said.
It comes down to: The realignment of trade balances often leads to falsely high calculations of economic growth in the run-up to a recession. Inflation-adjusted GDP reflected healthy gains around the start of four of the last six downturns, Joseph LaVorgna, chief economist at SMBC Nikko Securities America and former economic adviser to the Trump White House, wrote in a note.
The economy is not out of the woods, even as Thursday’s key GDP figure shows a recovery.
US consumer confidence fell to its lowest level since July in October as high borrowing costs and rising inflation take their toll on household budgets, my colleague Alicia Wallace reports.
The short-term outlook for consumers remains “bleak,” said Lynn Franco, the Conference Board’s senior director of economic indicators.
“In particular, concerns about inflation – which had been easing since July – have increased again, with both gas and food prices as the main drivers,” Franco said in a statement. “Looking ahead, inflationary pressures will continue to be a strong headwind for consumer confidence and spending, which could result in a challenging holiday season for retailers.”
Consumer optimism has waned not only for the current economic period, but also for what might come in the months ahead.
That’s not a great economic omen.
The numbers: The consumer confidence index fell to 102.5 from a revised 107.8 in September, according to data released by the Conference Board on Tuesday. Economists were counting on a reading of 106.5, according to Refinitiv estimates. A reading above 100 indicates that consumers are optimistic about the economy. In February 2020, the consumer confidence index was 132.6.
Don’t expect it to get cheaper anytime soon. Major food and beverage CEOs warn of future price hikes.
Kraft Heinz (KHC) CEO, Miguel Patricio, told CNN Business’s Christine Romans in a recent interview that higher inflation and supply issues are sweeping the food industry, causing his company to keep raising prices.
“We have already raised the prices we expected this year, but I predict inflation will continue next year, and as a result [we] will see other rounds of price increases,” said Patricio.
On Tuesday, Coca-Cola (KO) CEO James Quincey made similar comments. “There will be more than normal input costs,” Quincey said on CNBC’s Squawk on the Street. “So we expect prices to be higher than normal next year, on top of what happened this year.”
That’s not bad news for Coke, though. Higher Coke prices helped net revenue rise 10% in the third quarter.