Huatai Securities released a research report stating that in the first half of the year, US growth exceeded expectations, while GDP growth in the third quarter further accelerated to an annualized level of 3.5% -4%. The mismatch between the "strong resilience" of growth and the inverted curve has become an important driving factor for the rise in long-term interest rates of US Treasuries in the second half of the year. The team expects that the year-on-year growth rate in the fourth quarter may slow from nearly 4% in the third quarter to around 1%. Due to the fact that most of the four major drag factors are non permanent, the trend of US economic growth next year may not continue the significant slowdown in the fourth quarter of this year.
The following is a core summary of Huatai Securities:
Overview: In the first half of the year, US growth exceeded expectations, and in the third quarter, GDP growth further accelerated to an annualized level of 3.5% -4%. The mismatch between the "strong resilience" of growth and the inverted curve has become an important driving factor for the rise in long-term interest rates of US Treasuries in the second half of the year. In this article, we explore multiple factors that may drag down the growth of the United States in the fourth quarter. We expect that the year-on-year growth rate in the fourth quarter may slow from nearly 4% in the third quarter to around 1%.
Looking ahead, the "expected gap" between market expectations and actual growth is expected to narrow. However, due to most of the four major drag factors being non permanent, the trend of US economic growth next year may not continue the significant slowdown in the fourth quarter of this year. At the high-frequency indicator level, changes in financial conditions remain the leading indicator of the largest "information volume" growth in the next 1-2 quarters.
Core viewpoints
Dragging 1: Tight Financial Conditions (FCI) Suppresses Growth in the Fourth and First Quarters
The tightening of financial conditions may lower GDP growth by about 1% in the fourth quarter. Since August, US bond interest rates have risen, spreads have widened, stock markets have fallen, and the US dollar has strengthened. The Common Goldman Sachs Financial Condition Index (FCI) has tightened by nearly 100 basis points. From a design perspective, Goldman Sachs' financial conditions tightened by 100 basis points, dragging down the month on month growth rate of about 100 basis points for the next two quarters.
Drag 2: Strong summer consumption growth may slow down in the fourth quarter
The summer tourism peak and other factors have led to strong summer consumer spending in the United States, but it may significantly decline from September to November, and high-frequency indicators also confirm this pattern. After the epidemic, consumption in the United States showed a characteristic of "prioritizing services over goods", resulting in significantly stronger holiday consumption compared to the previous season (i.e. adjusted using seasonal factors), but with a high probability of falling thereafter. From June to August, the actual expenditure on entertainment and transportation by American residents (PCE) increased by about 10% compared to the same period last year, and these expenditures may decline after the peak of travel. BEA card swiping data shows that residents' spending on entertainment, catering, and transportation surged during the summer, but began to decline after September. At present, the seasonally adjusted year-on-year growth of PCE may decrease from 3.0% in the third quarter to 0.5% in the fourth quarter.
Dragging 3: Repayment of student loan interest or marginal pressure on consumption growth
After the interest exemption for student loans expires, interest expenses will be reduced by approximately 0.4 points of disposable income of GDP. The total size of student loans is approximately $1.6 trillion, with an average interest rate of approximately 4.7% annualized for undergraduate students and 6.1% for graduate students, with 9% coming from the government. During the epidemic, student loan interest was exempted, but starting from October this year, student loan holders are required to start repaying interest. It is estimated that restarting interest repayment may affect the disposable income of 27 million people, and the monthly interest expenditure will be approximately $200 to $300. According to the daily interest income of the Ministry of Education, the annualized interest on student loans is approximately $92 billion, equivalent to 0.4% of GDP.
Dragging 4: The US government still faces the risk of temporary shutdown in the fourth quarter, which may affect short-term growth
We estimate that a one week government shutdown will drag down the GDP of the fourth quarter by about 0.1 percentage points. Under the benchmark scenario, if a shutdown occurs and is expected to last for 2-3 weeks, it will drag down the GDP growth of the fourth quarter by 0.2 to 0.3 percentage points. The recall of McCarthy may make it more difficult for both parties to reach a compromise on the 2024 fiscal year budget, and it is not ruled out that the government may temporarily shut down again on November 17th (see "How will the removal of the President of the United States House of Representatives affect it?", October 07, 2023; "The US government faces the risk of a temporary shutdown again", September 26, 2023). There is still uncertainty about whether the two parties can pass the budget or pass short-term financing plans again before November 17th. On the one hand, the candidate for the Speaker of the House of Representatives has not yet been determined, and there has been no candidate that can garner widespread support, leaving less than a month for budget negotiations between the two parties. On the other hand, the two parties still have differences in government spending, aid to Israel and Ukraine, and border controls. But considering the negative impact of suspending government employee salaries before Christmas in December, even if the door is closed, the time may be less than one month.
Risk reminder: The US government has been closed for longer than expected, and financial conditions have tightened beyond expectations.