US Economy Expected to Drastically Slow By The End of the Year
NEW YORK (October 27) The U.S. economy appeared to defy gravity in the third quarter, growing faster than expected and at a pace not seen in almost two years, but economists say the free-spending summer behind the surge is over and the rest of the year looks dramatically slower.
The nation's gross domestic product grew at an astonishing 4.9% annual pace in the third quarter, the Commerce Department's Bureau of Economic Analysis reported on Thursday, an unexpected feat not to be repeated any time soon.
"I continue to expect GDP growth to slow meaningfully in the current quarter to near 1% annualized," said Mark Zandi, chief economist for Moody's Analytics, citing several economic headwinds.
"The resumption of student loan payments, the UAW [autoworkers] strike, and higher borrowing costs," are among the drags he noted. "A government shutdown would also hurt growth if that happened a few weeks from now."
There's also the potential for a wider Middle East conflict simmering out of Israel's war against Hamas and a slowing global economy that drags down the U.S.
Zandi's forecast is less than half of the 2.1% GDP growth% in the second quarter and the 2.2% in the first quarter of this year. It would also represent about an 80% drop in economic activity from the third quarter, which could feel relatively much slower.
Bill Adams, chief economist for Comerica Bank in Dallas, forecasts fourth quarter growth even lower, at 0.7%. He also sees first-quarter 2024 growth slowing to 0.5%.
"Consumer and government spending were big tailwinds to growth," in the third quarter, he said in a note. "Business spending on inventories was strong, while fixed-investment growth was slower. But continued jobless claims are up sharply in the month through mid-October, a sign that the economy is slowing in the fourth quarter."
James Knightly, chief international economist at ING sees fourth-quarter GDP dropping to 1.5% as rising interest rates take their toll.
"The cumulative effects of Federal Reserve interest rate increases and reduced credit availability are showing signs of finally biting," he said in a note. "Credit card borrowing costs are the highest since records began, car loan and personal loan rates are soaring while mortgage rates are up at 8%."
Consumer spending was among the biggest drivers of GDP growth in the third quarter, juiced by Taylor Swift and Beyoncé concerts and blockbuster films Barbie and Oppenheimer.
"While the GDP report came in stronger than expected, it remains to be seen whether the consumer can maintain resiliency as headwinds begin to mount," said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis.
But growth at any pace is still growth, which means a recession doesn't appear to be looming over the near horizon.
"While a year-end recession now appears unlikely, we still see a sharp downturn in growth," Wells Fargo's lead U.S. economist Michael Pearce said in a research note. The additional tightening of financial conditions over recent weeks means more of that weakness is likely to show up in the first half of 2024."
Additionally, nothing in the third-quarter GDP report seems to have influenced expectations for the Fed, which meets next week to decide on interest rates.
The CME FedWatch Tool, which is based on Fed funds futures trading, is showing a more than 99% chance that the Fed will not raise rates at its Oct. 31-Nov. 1 meeting and about 80% chance it won't do so in December.
"Markets are still expecting no change in target rates at the upcoming Federal Reserve policy meetings," said Jeffrey Roach, chief economist for LPL Financial in Charlotte, N.C. "It’s too early to be dogmatic about the final quarter of the year but investors should expect some deceleration in momentum."
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