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The housing market is dropping fast. 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 that the de facto economic report card for the third quarter — gross domestic product, or GDP — due Thursday will be bleak.
But here’s the thing.
Economists are actually predicting decent, if not spectacular, growth. The consensus forecast of economists polled by Reuters is for GDP to grow at an annual rate of 2.1% in the third quarter. (This will be the first estimate for third-quarter GDP, and there will be several revisions in the coming weeks.)
There is an even brighter forecast from the Federal Reserve Bank of Atlanta, whose well-watched and well-respected GDPNow model tracks all recent economic data and comes up with a forecast for GDP. The latest GDPNow reading calls for 2.9% annual growth.
Why so pink despite all the gloomy news? First, a large portion of GDP is made up of consumer spending – and while we all complain about inflation, rising prices haven’t actually stopped consumers from shelling out just yet. 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, unemployment is near a half-century low of 3.5%, and wages are growing (albeit not as fast as prices).
If GDP ends up rising somewhere between 2% and 3% – instead of shrinking as it did in both the first and second quarters – 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 will likely continue to raise interest rates sharply to finally throttle inflation once and for all. Yes, it increases the odds of a possible recession down the road because rate hikes take time to affect most parts 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 bigger risk is an economy that stands at the cost of rising prices, ADP chief economist Nela Richardson said in a report. She argued that inflation can boost growth nominally because consumers spend more…but it comes at a cost. It eats into workers’ wages.
Beyond a strong third-quarter report, however, some economists are concerned about growth going forward.
“The looming GDP hit from higher rates and a stronger dollar is huge,” Jefferies 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 interest rates to fight inflation in the early 1980s under then-Fed Chairman Paul Volcker.
These interest 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 act quickly enough to cut rates again once the economy shows longer-term signs of slowing.
“We also expect the Fed to be slow to respond to economic weakness, which will likely prolong the next recession and worsen its severity,” they said, adding that they don’t think the Fed will cut interest rates until early 2024. .. although a recession may begin in the third quarter of 2023.
In other words, the much-anticipated “soft landing” for the economy may turn out to be a pipe dream.
“An economic downturn is likely in 2023 due to the difficulty of achieving a soft landing in general. Achieving a soft landing with inflation above 8 percent will prove even more challenging,” said José Torres, senior economist at Interactive Brokers, in a report.
“This recession may require the Fed to keep its foot on the brake longer,” he added. “Fighting high inflation while keeping economic growth positive is a challenging ordeal.”
The score: So the good news is that the economy is not likely to be in a recession just yet … and third quarter GDP should support that view. The problem is that a decline is probably still coming sometime in 2023.
The gain has helped boost the stock market so far this month. But one sector that is usually the best, technology, is unlikely to satisfy investors.
Results from social media company Snapchat ( SNAP ), which gave a gloomy outlook, were not encouraging. And as CNN Business’ Clare Duffy points out, upcoming earnings from the likes of Apple ( AAPL ) , Amazon ( AMZN ) , Google owner Alphabet ( GOOGL ) , Microsoft ( MSFT ) and Facebook parent Meta won’t be too promising either.
The decline in online advertising will hurt several of these companies, most notably Meta and Alphabet, which also owns YouTube. The strength of the dollar will also eat into all their international sales and profits.
There are still hopes that these tech titans will have a better outlook for the fourth quarter. After all, technology usually shines during the holidays when consumers splurge on gadgets.
But with inflation taking a bite out of household budgets, it remains to be seen how many new iPhones, Pixels, Xboxes and Quest VR headsets will arrive in those smiley Amazon boxes in December.
Monday: UK and Eurozone PMIs Blink; Earnings from Hyundai, Philips (PHG) and Discover (DFS)
Tuesday: US consumer confidence; revenue 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: New Home Sales 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 interest rate decision; China industrial production; US Weekly Jobless Claims; US durable goods; 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: US personal income and expenditure; US PCE inflation; Bank of Japan rate decision; GDP of France and Spain; earnings from Exxon Mobil (XOM), Chevron (CVX), Volkswagen (VLKAF), AbbVie (ABBV), Charter Communications (CHTR), and Colgate-Palmolive (CL)