A version of this story first appeared in CNN Business’s Before the Bell newsletter. Not a subscriber? you can register right here.
The real estate 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 that, one would think that the de facto economic report for the third quarter (gross domestic product or GDP) due on Thursday will be bleak.
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 more optimistic projection from the Federal Reserve Bank of Atlanta, whose widely watched and highly respected GDPNow model tracks all of the latest economic data and presents a projection for GDP. The latest GDPNow reading calls for 2.9% annualized growth.
Why so optimistic despite all the bad news? For one thing, a large part of GDP is made up of consumer spending, and while we all complain about inflation, rising prices haven’t really stopped consumers from splurging yet. According to government figures, retail sales rose 8.2% in September from a year earlier.
It also helps that the job market remains healthy. American businesses are adding hundreds of thousands of jobs a month, the unemployment rate is near a half-century low of 3.5%, and wages are growing (though not as fast as prices).
If GDP ends up rising 2% to 3%, instead of contracting as it did in both the first and second quarters, it means we are less likely to be in a recession. That would be good news for consumers, investors and the Federal Reserve.
That also means the Fed is likely to continue to slash interest rates to finally quell inflation once and for all. Yes, that raises the odds of an eventual recession down the road, as rate hikes take time to affect most of the real economy, 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 can nominally boost growth as consumers spend more… but it comes at a cost. It eats up workers’ paychecks.
However, beyond a strong third-quarter report, some economists are concerned about the future impact on growth.
“The impending hit to GDP from 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 was aggressively raising rates to fight inflation in the early 1980s under then-Fed Chairman Paul Volcker.
Those rate hikes helped cause the so-called double dip recession, where the economy suffered two recessions between 1980 and 1982.
Markowska and Simons are also concerned that the Fed is so focused on inflation that it won’t act fast enough to lower rates again once the economy shows longer signs of weakening.
“We also expect the Fed to respond slowly to economic weakness, which is likely to prolong the next recession and exacerbate its severity, they said, adding that they don’t think the Fed will cut rates until early 2024…even though a recession could start in the third quarter of 2023.
In other words, the long-awaited “soft landing” of the economy could turn out to be a pipe dream.
“An economic recession 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,” José Torres, senior economist at Interactive Brokers, said in a report.
“This recession may require the Fed to keep its foot on the brake for longer,” he added. “Fighting high inflation while maintaining positive economic growth is a challenging test.”
The bottom line: 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 recession is probably still looming sometime in 2023.
The gains have helped prop up the stock market so far this month. But a sector that normally performs better, technology, is unlikely to please investors.
The results of the social networking company Snapchat (SNAP), which issued a gloomy outlook, were not encouraging. And as Clare Duffy of CNN Business points out, the upcoming earnings of companies like Apple (AAPL), Amazon (AMZN), Google owner Alphabet (GOOGL), Microsoft (MSFT) and Facebook parent Meta may not be Not too promising either.
The slowdown 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 affect all of your international sales and profits.
There is still hope that these tech titans have more optimistic prospects for the fourth quarter. After all, technology often shines during the holidays when consumers splurge on gadgets.
But with inflation taking a toll on family budgets, it remains to be seen how many new iPhones, Pixels, Xboxes and Quest VRs will arrive in those smiling boxes from Amazon this December.
Monday: Advance PMI for the UK and the Eurozone; Earnings of Hyundai, Philips (PHG) and Discover (DFS)
Tuesday: US consumer confidence; earnings 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: US new home sales; 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; Chinese industrial production; weekly US jobless claims; American Durable Goods; Comcast (CMCSA), Samsung (SSNLF), Unilever (UL), Credit Suisse (CS), Anheuser-Busch InBev (BUD), Caterpillar (CAT), Merck (MRK), Southwest (LUV), McDonald’s (MCD) earnings , Mastercard (MA), Amazon, Apple, Intel (INTC), T-Mobile (TMUS) and Capital One (COF)
Friday: US personal income and expenses; US PCE inflation; Bank of Japan rate decision; GDP of France and Spain; earnings of Exxon Mobil (XOM), Chevron (CVX), Volkswagen (VLKAF), AbbVie (ABBV), Charter Communications (CHTR) and Colgate-Palmolive (CL)