Strong U.S. economic growth expected in fourth quarter, outlook darkening By Reuters


© Reuters. FILE PHOTO: A person walks beneath the rain along with his purchasing bag through the vacation season in New York Metropolis, U.S., December 15, 2022. REUTERS/Eduardo Munoz

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economic system seemingly maintained a robust tempo of development within the fourth quarter as customers boosted spending on items, however momentum seems to have slowed significantly in the direction of the top of the yr, with greater rates of interest eroding demand.

The Commerce Division’s advance fourth-quarter gross home product report on Thursday may mark the final quarter of stable development earlier than the lagged results of the Federal Reserve’s quickest financial coverage tightening cycle because the Eighties kick in. Most economists count on a recession by the second half of the yr, although gentle in comparison with earlier downturns.

Retail gross sales have weakened sharply over the past two months and manufacturing appears to have joined the housing market in recession. Whereas the labor market stays sturdy, enterprise sentiment continues to bitter, which may ultimately harm hiring.

“This appears prefer it might be the final actually optimistic, sturdy quarterly print we’ll see for some time,” stated Sam Bullard, a senior economist at Wells Fargo (NYSE:) Securities in Charlotte, North Carolina. “Markets and most of the people will look via this quantity. More moderen information are suggesting that financial momentum is constant to gradual.”

In response to a Reuters survey of economists, GDP development seemingly elevated at a 2.6% annualized fee final quarter after accelerating at a 3.2% tempo within the third quarter. Estimates ranged from a 1.1% fee to a 3.7% tempo.

Strong second-half development would erase the 1.1% contraction within the first six months of the yr.

Progress for the complete yr is anticipated to come back in at round 2.1%, down from the 5.9% logged in 2021. The Fed final yr raised its coverage fee by 425 foundation factors from close to zero to a 4.25%-4.50% vary, the very best since late 2007.

Client spending, which accounts for greater than two-thirds of U.S. financial exercise, is anticipated to have grown at a tempo sooner than the two.3% fee notched within the third quarter. That will principally replicate a surge in items spending initially of the quarter.

Spending has been underpinned by labor market resilience in addition to extra financial savings accrued through the COVID-19 pandemic. However demand for long-lasting manufactured items, that are principally purchased on credit score, has fizzled and a few households, particularly decrease earnings, have depleted their financial savings.

Financial development additionally seemingly obtained a carry from enterprise spending on tools, mental property and nonresidential buildings. However with demand for items tanking, enterprise spending additionally misplaced some luster because the fourth quarter ended.

Regardless of the clear indicators of a weak handover to 2023, some economists are cautiously optimistic that the economic system will skirt an outright recession, however reasonably endure a rolling downturn, the place sectors decline in flip reasonably than suddenly.

ROLLING RECESSION

They argue that financial coverage now acts with a shorter lag than was beforehand the case due to advances in expertise and the U.S. central financial institution’s transparency, which they stated resulted in monetary markets and the true economic system performing in anticipation of fee hikes.

“We’ll proceed to have optimistic GDP numbers,” stated Sung Gained Sohn, a finance and economics professor at Loyola Marymount College in Los Angeles. “The reason being sectors are taking turns taking place, and never simultaneous declining. The rolling recession started with housing and now we’re seeing the subsequent part which is consumption associated.”

Certainly, with demand for items slumping, manufacturing facility manufacturing has declined sharply for 2 straight months. Job cuts within the expertise business have been additionally seen as flagging cutbacks in capital spending by companies.

Whereas residential funding seemingly suffered its seventh straight quarterly decline, which might be the longest such streak because the collapse of the housing bubble triggered the Nice Recession, there are indicators the housing market might be stabilizing. Mortgage charges have been trending decrease because the Fed slows the tempo of its fee hikes.

Stock accumulation was seen including to GDP final quarter, however with demand slowing, companies are prone to concentrate on decreasing inventory of their warehouse reasonably than putting new orders, which might undercut development within the quarters forward.

Commerce, which accounted for the majority of GDP development within the third quarter, was seen both making a small contribution or subtracting from GDP development. Robust development is anticipated from authorities spending.

Whereas the labor market to this point has proven outstanding resilience, economists argue that deteriorating enterprise situations will pressure firms to gradual hiring and lay off staff.

Firms exterior the expertise business in addition to interest-rate delicate sectors like housing and finance are hoarding staff after struggling to seek out labor through the pandemic.

A separate report from the Labor Division on Thursday is prone to present preliminary claims for state unemployment advantages rose to a seasonally adjusted 205,000 for the week ended Jan. 21, from 190,000 within the prior week, in line with a Reuters survey of economists.

“We count on preliminary jobless claims will ultimately begin to flip again up after their current drop, in keeping with an eventual downturn in payrolls and an increase within the unemployment fee,” stated Kevin Cummins (NYSE:), chief economist at NatWest Markets in Stamford, Connecticut. “In flip, we count on spending to gradual as customers can be much less prepared to run down financial savings within the face of a deteriorating labor market.”

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