Economy slowing to near-halt to end the year
A U.S. economy that has rolled through most of 2023 is now set to limp into the end of the year as a variety of obstacles finally takes their toll. Be it the United Auto Workers strike , the impending government shutdown or the resumption of deferred student loan payments , ominous barriers to growth have been lining up. Those factors are hardly all that’s standing in the way: the bite from higher interest rates, a slowing labor market and soaring energy costs are looming out there as well. The Wall Street consensus is that the economy likely will grow little or not at all in the fourth quarter, with a possibility even that gross domestic product could turn negative for the first time in a year and a half. “The economic headwinds are blowing, and they’re blowing harder and harder,” said Mark Zandi, chief economist at Moody’s Analytics. “Each one of these headwinds by themselves could blow this economy over, but together, they’re going to try their darndest to do it. Hopefully, they don’t blow any harder than they are right now.” Like many others on the Street, Zandi is forecasting a weak fourth quarter, with GDP accelerating at a pace of around 1% annualized, adding that “I can’t rule out a negative quarter given these headwinds.” On the bright side, forecasters generally agree that the U.S. will avert, albeit narrowly, its second brush with a potential recession in the past two years. But that doesn’t mean there won’t be some pain, possibly exacerbated if any one of the aggravating factors should prove even worse than expected. ‘A fourth-quarter pothole’ Most agree that the three main pitfalls — or potholes, in Goldman Sachs terminology — are the UAW strike, the student loan repayments and the government shutdown. Goldman even has quantified the potential risks. “Even as the basic macro view and our core construct on markets haven’t shifted, near-term risks and market pricing have and, with that, so has the location of the large asymmetries,” Goldman economists Ronnie Walker and Alec Phillips said in a recent client note. “On cue, a fourth-quarter pothole in U.S. growth lies ahead, and that may lead to a more balanced growth picture globally, dimming the shine on U.S. outperformance, providing more confidence in a Fed on hold and reversing some of the recent push higher in U.S. rates,” the pair wrote. There’s a lot to unpack in that statement, but it essentially refers to the likelihood that the domination of the U.S. in the global growth picture is waning. In turn, that could mean the Fed will be less eager to tighten monetary policy, as weakness in growth could bring down inflation on its own. As for the big-three risk factors, Goldman sees these risks: student loan repayments weighing half a percentage point on Q4 GDP, the government shutdown costing about 0.2 percentage points per week, and the auto strike shaving 0.05 percentage points to 0.1 percentage points per week. Altogether, the firm figures the third quarter will ost a relatively strong 3.1% gain, before that figure tumbles to just 0.7% in the fourth quarter, right around the consensus for a firm that has been one of the more optimistic outfits on Wall Street. In Goldman’s view, growth rebounds somewhat in Q1 of 2024 to 1.9% “as these temporary drags abate and income growth reaccelerates on the back of continued solid job growth and rising real wages.” GDP saw gains of 2.2% and 2.1% respectively in the first two quarters of the year; the Atlanta Fed’s GDPNow rolling data tracker is putting the Q3 gain at 4.9%, though many economists think that’s too high. Market impact Worries over growth have weighed on financial markets. The S & P 500 just wrapped up a tough month in September in which the big-cap index dropped about 5% , finishing off a quarterly decline of nearly 4%. The index has been tied closely to surging bond yields and rising oil prices, with geopolitical concerns lurking as well. The good news for markets is that the fourth quarter historically has been a good three months, posting average 5% gains since 1990, according to Sam Stovall, chief investment strategist at CFRA. Moreover, Q4 right before election years has posted average gains of 7.7%, with positive returns 88% of the time. Fortunes in the year’s final quarter may largely be tied to Fed policy. The central bank is expected to stay put on rates even as officials talk publicly about the need to keep up the fight against inflation and hold rates for higher for longer. JPMorgan Chase CEO Jamie Dimon recently cautioned clients that the Fed may have to take rates a good deal higher yet. But Friday’s inflation data — the Fed’s preferred gauge, the personal consumption expenditures price index — saw the core rate in August fall to 3.9%, its lowest annual rate in nearly two years. Still, that’s well rate above the central bank’s 2% target, posing another potential headwind to growth. “We’re not out of the woods yet. A trifecta of dollar, yields and oil has been the primary pressure on stocks,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “The conditions are supportive of a Fed pause, maybe another hike, but they’re not supportive of a pivot to rate cuts. That’s still a narrative yet to be sufficiently squashed by (Fed Chair Jerome) Powell and others.” Despite the looming slowdown, consumers, who are pivotal to U.S. growth, have managed to hang in there. Consumer sentiment barely dipped in September, according to the University of Michigan’s widely-watched survey , while the outlook for inflation a year from now fell again, to an expected 3.2% rate. The Commerce Department reported Friday that real after-tax income fell in August, but spending nudged higher. But consumers can’t be expected to keep going with all of the headline noise in the current environment. “They’ve got to be pretty upset with all the news, right?” Zandi, the Moody’s economist said. “A government shutdown, UAW strike, just one thing after the next thing. The collective psyche is just frayed after all everyone’s been through.”
