A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber ? You can register here.
The housing market is rapidly losing steam. Interest rates continue to rise. The stock market remains volatile. And inflation continues to be a major problem for people trying to pay their bills.
Given all of this, one would think that the de facto third quarter economic record – gross domestic product, or GDP – expected on Thursday will be grim.
But here’s the thing.
Economists actually predict decent, if not spectacular, growth. The consensus forecast of economists polled by Reuters is that GDP grew at an annualized rate of 2.1% in the third quarter. (This will be the first estimate of third-quarter GDP, and there will be several revisions in the coming weeks.)
There’s an even rosier projection from the Federal Reserve Bank of Atlanta, whose widely watched and respected GDPNow model tracks all the latest economic data and offers a GDP projection. GDPNow’s latest reading predicts annualized growth of 2.9%.
Why so pink despite all the bad news? For one thing, a large chunk of GDP is consumer spending – and while we all complain about inflation, rising prices haven’t yet stopped consumers from splurging. According to government figures, retail sales rose 8.2% in September from a year ago.
It also helps that the labor market is still healthy. American companies are adding hundreds of thousands of jobs a month, the unemployment rate is near a half-century low of 3.5%, and wages are rising (but not as fast as prices).
If GDP ends up growing between 2% and 3% – instead of contracting as it did in the first and second quarters – that means we are less likely to be in a recession. This would be good news for consumers, investors and the Federal Reserve.
It also means that the Fed will likely continue to raise interest rates sharply to finally quell inflation once and for all. Yes, it does increase the odds of an eventual recession, as rate hikes take time to impact most sectors of the real economy, with mortgage rates and housing being the notable exception.
“The Fed risks triggering a US recession with its rate increases, but the biggest 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 cost. It eats away workers’ paychecks.
Beyond a strong third-quarter report, however, some economists worry about the future impact on growth.
“The impending GDP, hit by higher rates and a stronger dollar, is huge,” 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 raised rates to fight inflation in the early 1980s under Fed Chairman Paul Volcker.
These rate hikes helped cause a so-called double-dip recession, where the economy suffered two downturns between 1980 and 1982.
Markowska and Simons also worry that the Fed is so intensely focused on inflation that it won’t move quickly enough to cut rates again once the economy shows signs of a more prolonged slowdown.
“We also expect the Fed to be slow to react to economic weakness, which will likely prolong the next recession and exacerbate its severity,” they said, adding that they do not believe the Fed will cut rates. before the start of 2024… although a recession could begin by the third quarter of 2023.
In other words, the long-awaited “soft landing” of the economy may turn out to be a pipe dream.
“An economic downturn is likely in 2023 due to the difficulty in achieving a soft landing in general. Achieving a soft landing with inflation above 8% will prove even more difficult,” José Torres, senior economist at Interactive Brokers, said in a report.
“This recession could force the Fed to keep its foot on the brakes longer,” he added. “Fighting high inflation while maintaining positive economic growth is a tough test.”
The bottom line: The good news is therefore that the economy is probably not yet in recession… and third quarter GDP should confirm this opinion. The problem is that a downturn is likely still to come at some point in 2023.
Earnings have helped support the stock market so far this month. But one sector that generally performs best, technology, is unlikely to please investors.
Results from social media company Snapchat (SNAP), which posted a dismal outlook, were not encouraging. And as CNN Business’s Clare Duffy points out, upcoming revenue from Apple (AAPL), Amazon (AMZN), Google owner Alphabet (GOOGL), Microsoft (MSFT) and Facebook parent Meta is not maybe not very promising either.
The slowdown in online advertising will hurt several of these companies, including Meta and Alphabet, which also owns YouTube. The strong dollar will also eat away at all of their international sales and profits.
There is still hope that these tech titans will have a more optimistic outlook for the fourth quarter. After all, technology usually shines during the holidays as consumers splurge on gadgets.
But with inflation eating away at household budgets, it remains to be seen how many new iPhone, Pixel, Xbox and Quest VR headsets will arrive in those smiley boxes from Amazon in December.
Monday: UK and eurozone flash PMI; Earnings from Hyundai, Philips (PHG) and Discover (DFS)
Tuesday: US consumer confidence; revenues of 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: sales of new homes in the United States; earnings 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 rate decision; Industrial production in China; weekly jobless claims in the United States; US durable goods; revenues 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 expenses in the United States; US PCE inflation; Bank of Japan Rate Decision; GDP of France and Spain; revenues from Exxon Mobil (XOM), Chevron (CVX), Volkswagen (VLKAF), AbbVie (ABBV), Charter Communications (CHTR) and Colgate-Palmolive (CL)
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