Anticipating strong economic growth in the US in the fourth quarter, the outlook is bleak

WASHINGTON (Reuters) – The U.S. economy likely maintained a solid pace of growth in the latest quarter as consumers increased spending on goods, but momentum appears to have slowed significantly towards the end of the year, with higher interest rates eroding demand.

The fourth-quarter GDP report from the Commerce Department on Thursday could point to the last quarter of solid growth before the late effects of the Fed’s fastest tightening cycle since the 1980s kick in. Most economists expect a recession by the second half of the year, although it will be mild compared to previous recessions.

Retail sales have fallen sharply over the past two months and manufacturing appears to have joined the housing market in the doldrums. While the job market remains strong, business sentiment continues to deteriorate, which could ultimately hurt employment.

“It looks like this could be the last really strong and positive quarterly print we’ll see for some time,” said Sam Bullard, chief economist at Wells Fargo Securities in Charlotte, North Carolina. “Markets and most people will look at that number. Recent data suggests that economic momentum continues to slow.”

According to a Reuters survey of economists, GDP growth probably increased at an annual rate of 2.6% in the latest quarter after accelerating to a 3.2% pace in the third quarter. Estimates ranged from 1.1% to 3.7%.

Strong growth in the second half should erase the 1.1% contraction in the first six months of the year.

Growth for the full year is expected to come in at around 2.1%, down from 5.9% recorded in 2021. Last year the Fed raised its policy rate by 425 basis points from near zero to a range of 4.25%-4.50%, the highest rate since late 2007.

Consumer spending, which accounts for more than two-thirds of US economic activity, is expected to grow faster than the 2.3% rate recorded in the third quarter. This will mostly reflect an increase in spending on goods at the beginning of the quarter.

Spending has been supported by labor market flexibility as well as excess savings accumulated during the COVID-19 pandemic. But demand for long-running manufactured goods, which are mostly bought on credit, has faded, and some families, especially low-income ones, have exhausted their savings.

Economic growth is also likely to have been boosted by business spending on equipment, intellectual property and non-residential structures. But as demand for goods fell, business spending also lost some of its luster as the fourth quarter ended.

Despite clear signs of weak delivery through 2023, some economists are cautiously optimistic that the economy will avoid an outright recession but instead suffer a sustained contraction, with sectors falling in turn rather than all at once.

Rolling slack

They argue that monetary policy now operates with a shorter lag than it did previously because of advances in technology and the transparency of the US central bank, which they say has caused financial markets and the real economy to move in anticipation of higher interest rates.

“We will continue to have positive GDP numbers,” said Song Won-soon, professor of finance and economics at Loyola Marymount University in Los Angeles. “The reason is that sectors take turns declining, not at the same time. The recession started rolling in with housing and now we’re seeing the next phase which has to do with consumption.”

In fact, as demand for commodities slumped, factory output fell sharply for two consecutive months. Job cuts in the technology industry were also seen as subdued cuts in capital spending by companies.

While residential investment may have suffered its seventh consecutive quarterly decline, which would be the longest such streak since the collapse of the housing bubble triggered the Great Recession, there are signs that the housing market could stabilize. Mortgage rates are trending lower as the Federal Reserve slows the pace of interest rate hikes.

Inventory buildup was seen adding to GDP in the most recent quarter, but as demand slows, companies are likely to focus on reducing inventory in their warehouses rather than placing new orders, which could undermine growth in the coming quarters.

Trade, which accounted for the bulk of GDP growth in the third quarter, was seen either making a small contribution or subtracting from GDP growth. Strong growth is expected from government spending.

While the labor market has so far shown remarkable resilience, economists argue that deteriorating working conditions will force companies to slow hiring and layoffs.

Companies outside the tech industry as well as interest rate-sensitive sectors like housing and finance are piling on workers after struggling to find work during the pandemic.

A separate report from the Labor Department on Thursday is likely to show that initial claims for state unemployment benefits rose to a seasonally adjusted 205,000 for the week ending January 3rd. 21, up from 190,000 in the previous week, according to a Reuters survey of economists.

“We expect initial jobless claims to eventually start to rebound after their recent decline, consistent with an eventual downturn in payrolls and a rise in the unemployment rate,” said Kevin Cummins, chief economist at NatWest Markets in Stamford, Connecticut. “In contrast, we expect spending to slow because consumers will be less willing to put their savings to work in the face of a deteriorating labor market.”

(Reporting by Lucia Mutecani) Editing by Andrea Ricci

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