A version of this story first appeared in CNN Business’s Before the Bell newsletter. Not a subscriber? You can register right here. You can listen to an audio version of the newsletter by clicking the same link.
New York CNN store —
Looming recession is the topic of the day. From Goldman Sachs to the IMF, analysts and economists seem to agree that an economic downturn is imminent for the United States 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.
However, investors should be wary of positive headlines. Economists warn the report could be a one-hit wonder exaggerates the momentum in an economy that is actually slowing.
What’s happening: Gross domestic product, a broad measure of economic activity, grew an estimated 2.4% between July and September, according to Refinitiv. That’s huge considering we’ve just had six months of economic contraction.
This decline, coupled with persistent inflation and rising interest rates, led many to believe the US was headed for a recession. A quarter of growth won’t necessarily change that, say economists, who see it less as a salvation and more as a rebound from the slump.
“Going forward, fourth-quarter growth could well turn negative and likely be very weak next year,” David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a statement Monday.
Mortgage rates have more than doubled since the beginning of the year. The US dollar is now up almost 20% year-on-year when weighed against a basket of its six closest peers. (Its strength may hurt US exports and US corporate overseas earnings, which could weigh on growth.) The government budget deficit has now been halved, suggesting lower government spending.
“More braking force is being put on the US economy than is even apparent in the third-quarter GDP report,” Kelly wrote.
Unless the United States experiences a deep recession and subsequent recovery, or labor force participation and productivity spikes, “there is little reason to expect booming growth anytime for the next few years,” he added.
In addition, third-quarter GDP is likely to increase on the back of a narrowing gap between exports and imports. But that’s because the United States is importing fewer goods as demand slacks. If you pop the hood and examine the numbers, says Andrew Patterson, a senior economist at Vanguard, you’ll see that American consumers and businesses are actually spending less. That’s a bad sign.
The numbers are also supported by a surge in inventories from retailers beginning to recover from supply chain issues earlier in the year.
What the Fed is looking for: Investors will be scouring Thursday’s economic data for clues to the Fed’s interest rate decision at next week’s monetary policy meeting. Fed officials will look at the report’s underlying metrics and likely ignore the headlines, Patterson said.
The report includes three categories that the Fed will pay particular attention to, Paterson said. The first is whether companies are investing in their future growth by buying things like new machines. Next 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 believes inflation-adjusted household consumption figures have fallen. “They can be downright negative,” he said.
The bottom line: Trade balance rebalancing often erroneously inflates estimates of economic growth ahead of 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 Trump White House economic adviser, wrote in a note.
The economy is not out of the woods yet, although Thursday’s GDP data 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 near-term outlook for consumers remains “bleak,” said Lynn Franco, the Conference Board’s senior director of economic indicators.
“Remarkably, concerns about inflation – which had been falling since July – rose again, with both gas and food prices serving as the main drivers,” Franco said in a statement. “Looking ahead, inflationary pressures will continue to provide strong headwinds for consumer confidence and spending, which could result in a challenging holiday season for retailers.”
Consumer optimism dimmed not only for the current economic period, but also for what could come in the coming months.
This is not a great economic omen.
The payment: The consumer confidence index fell to 102.5 from a revised 107.8 in September, according to data released Tuesday by the Conference Board. Economists were expecting a reading of 106.5, according to Refinitiv estimates. A reading above 100 signals optimistic consumer attitudes towards the economy. In February 2020, the consumer confidence index was 132.6.
Don’t expect things to get cheaper any time soon. Major food and beverage CEOs warn of impending price hikes.
In a recent interview with CNN Business’ Christine Romans, Miguel Patricio, CEO of Kraft Heinz (KHC), said that higher inflation and supply problems are sweeping through the food industry, leading to this his company to raise prices further.
“We have already increased prices, which we expected this year, but I expect inflation to continue next year and as a result [we] there will be more rounds of price hikes,” said Patricio.
On Tuesday, James Quincey, CEO of Coca-Cola (KO), made a similar statement. “It will be above normal input costs,” Quincey said on CNBC’s Squawk on the Street. “Therefore we expect prices to be above normal next year on top of what has happened this year. ”
That’s not bad news for Coke, however. Higher Coke prices helped lift net sales by 10% in the third quarter.