At 20:30 Beijing time on Thursday, the United States will release its initial gross domestic product (GDP) for the third quarter. The market generally expects that the US economy will once again perform strongly in the second half of the year, but the future situation may be significantly different.
According to Dow Jones data, the market expects an annualized quarterly GDP rate of 4.7% for the third quarter. If the forecast is correct, this will be the strongest output since the fourth quarter of 2021, with a growth rate slightly below 7% at that time.
However, policymakers, economists, and markets may focus more on the forward-looking signals sent by this repeatedly exceeding expected economy.
Joseph LaVorgna, Chief Economist of SMBC Nikko Securities, said, "We should view any data from the third quarter with a high degree of skepticism. GDP does not tell us where we will go. We can feel comfort and ambiguity about a good number. But the real problem is what will happen next
In fact, for most of the past two years, economists have been waiting for the economy to slow down and even anticipate a recession. The Federal Reserve itself had previously predicted a mild contraction in the economy, but recently, due to consumer resilience maintaining economic growth, the Federal Reserve withdrew this prediction.
Now, this situation is expected to occur again between July and September.
Consumers continue to spend
The Atlanta Federal Reserve has adopted a growth tracker called GDPNow to obtain real-time data and adjust predictions accordingly. Recent research by Goldman Sachs shows that the indicator has been performing well over the past two years or so, with 9 out of the past 10 quarters exceeding consensus expectations.
According to GDPNow, it is expected to grow by 5.4% in the third quarter, with over half (2.77 percentage points) coming from consumer spending. Exports are expected to contribute approximately 1 percentage point, while inventory is expected to contribute 0.7 percentage points.
Former President Trump's senior White House economist, LaVorgna, believes that consumers will contribute more than three-quarters of his expected 4.1% GDP growth. However, he predicts that the rise in borrowing costs and the generally expected decline in demand for high priced goods may eventually begin to affect demand indicators.
The income data shows that the economy is much weaker, "LaVorgna said." For me, there are many signs that although we are excited about the third quarter, this is definitely the last growth we have seen in a while
It is certain that the economy and its key consumer components have been on the brink of collapse in the past.
Since the beginning of 2022, Wall Street has strongly agreed that economic recession is almost inevitable due to the lagging impact of interest rate hikes. During the brief banking crisis in March 2023, this expectation was strengthened, with the Federal Reserve predicting that the crisis would limit credit and could lead to an economic recession.
But the Federal Reserve's measures to maintain liquidity in the industry, as well as the ambitious lending efforts of "shadow" non bank institutions, have helped the US economy weather the crisis and maintain growth momentum.
Steven Ricchiuto, Chief Economist of Mizuho Securities in the United States, said: "Consumers feel comfortable spending and borrowing money. Despite the poor interest rate environment, there is still a lot of spending going on. This is because the labor market is tight and people feel comfortable with their jobs
The US economy is like a "dynamic rabbit"
In fact, companies and governments are still hiring, putting upward pressure on economic growth and forcing the Federal Reserve to maintain high interest rates to combat inflation. While central bank officials are actively raising interest rates, they also claim that they do not want to drag the economy into recession.
Ricchiuto said, "The economy is like a dynamic rabbit. You have to find a way to stop it, but the Federal Reserve has been telling everyone that they don't really want to stop it
Therefore, the market can interpret strong GDP in multiple ways.
They may see this as a signal that the Federal Reserve still has more work to do on inflation issues. Or they can see it as a signal that the economy can withstand higher interest rates and is still growing. Even, they may believe that the data released by the US Department of Commerce on Thursday is too outdated and wait for more data to find clues to the Fed's next steps.
Since mid July 2022, the bond market has been sending strong signals that an economic recession is imminent. Since then, the yield of two-year US treasury bond has exceeded that of 10-year US treasury bond. This phenomenon is called yield curve inversion, and has never failed to predict the upcoming recession.
Nowadays, this inverted trend has sharply weakened, and the curve has almost flattened again - this is also a textbook signal that an economic recession is approaching. This is because after hanging upside down, the market will eventually begin to digest expectations of future growth slowdown or negative growth through lower yields.
Quincy Krosby, Chief Global Strategist at LPL Financial, said: "The market is sending a message that a recession is imminent and the Federal Reserve will have to cut interest rates
She added, "What they want to do is plan for an economic slowdown, but keep the labor market intact. And historically, this has been very difficult
Will the economy continue to ignore historical trends, such as recovering from the pressure of upside down yield curves? "Krosby said," This is the dilemma this market is facing