On Thursday local time, the US Department of Commerce will release the initial reading of gross domestic product (GDP) for the third quarter. The latest forecast from Wall Street shows that the US GDP growth rate will rise to over 4% in the previous quarter, marking the fastest growth rate since the fourth quarter of 2021. However, as the Federal Reserve's interest rate hike cycle approaches its end, topics such as whether the hot economy and inflation still far from the target will lead the Federal Reserve to further tighten policies, expected growth inflection points, and whether it will trigger an economic recession are widely discussed.
Consumer rebound boosts economic acceleration
The revised data released last month showed that the US economic growth rate in the second quarter was 2.1%, slowing down for four consecutive quarters. However, recent data suggests that the booming consumer spending will continue to support the US economy, with institutions predicting that US GDP growth in the third quarter will reach 4.3%.
From a sub sector perspective, the manufacturing industry, which accounts for 12% of the economy, continues to be sluggish, while the manufacturing indices of the New York Fed, Dallas Fed, and Philadelphia Fed continue to be in a shrinking range. The ISM manufacturing index in the United States has been in a contraction range for 10 consecutive months, setting the longest record since the 2008-2009 financial crisis.
The real estate industry is facing a test, with interest rate hikes pushing up mortgage rates and persistently high prices dampening homebuyers' enthusiasm. It is expected that the growth rate of housing investment will further slow down. At the same time, the risks of commercial real estate have not been fully released in the volatility of the US bond market.
The good news is that consumer spending, which accounts for more than two-thirds of US economic activity, has rebounded rapidly after the downturn in the second quarter. This is to some extent affected by the rise in energy prices, as consumers shift towards service spending, resulting in an increase in consumption of transportation, tourism, healthcare, and other related items. The strong increase in monthly retail sales rates between July and September ensured the expansion of the US economy. The hot labor market has become the backbone of American household consumption. After the labor market slowed down in the first half of this year, the number of non farm employment began to rebound, and the data on initial unemployment benefits fell back to historical lows. In order to compete for limited labor, employers are attracting job seekers and retaining employees by increasing salary rates above historical averages.
Trade data will also boost the data. In recent months, the import volume of the United States has gradually decreased, while the export volume has steadily increased. In August, exports increased by 1.6% to $256 billion, approaching a new historical high. It is expected that the US trade deficit in goods and services for the entire year of 2023 will reach its lowest level in nearly four years.
Business investment indicators have stabilized and rebounded. According to data from the US Department of Commerce, mechanical orders have increased in four months over the past five months, and new orders for non defense capital goods, excluding aircraft, increased by 1.4% month on month in September, accelerating for three consecutive months, reaching the fastest level since the beginning of 2022.
The Atlanta Federal Reserve's GDPNow tool, which accurately predicts initial reading data for the first quarter, released its final quarterly measurement report on Wednesday, predicting a GDP growth rate of 5.4%. Wells Fargo Bank stated in its report that if the US economy grows by 5% in the third quarter, it means that US GDP will return to pre pandemic levels.
The Federal Reserve's stance may continue to remain cautious
Recently released data shows that the US economic data for the fourth quarter remains resilient. With the arrival of the holiday consumption season and the escalation of the situation in the Middle East, the potential risks of overheating in the economy and inflation have to some extent increased the pressure on the Federal Reserve to raise interest rates.
Federal Reserve Chairman Powell also retained policy flexibility in his final speech before the silence period. He believes that the strength of the US economy and the ongoing tension in the labor market may require stricter policy conditions to control inflation, but the rise in US bond yields will help further tighten financial conditions and may reduce the need for further interest rate hikes by the Federal Reserve. Powell stated that in order for inflation to continue to return to the Fed's 2% target, "it may take a period of below-trend growth, and labor market conditions also need to further soften.
In the Economic Outlook Summary (SEP) released by the Federal Reserve last month, the median GDP growth rate for 2023 was revised up by 1.1 percentage points to 2.1% compared to June, and by 0.4 percentage points to 1.5% in 2024. The International Monetary Fund also raised its US growth forecast in its recently released global economic outlook report. In the eyes of market participants, with the gradual manifestation of policy lag effects, it is only a matter of time before the economy slows down at the current interest rate level. However, there are increasingly divergent views on whether a soft landing can be achieved. Federal funds rate futures show that the possibility of the Federal Reserve raising interest rates in the future is around 40%, and the first rate cut has been postponed until September next year. Maintaining high interest rates for a longer period of time will bring more uncertainty to the economy.
Oanda Senior Market Analyst Craig Erlam said in an interview with First Financial reporters that so far, there have been no signs of a turning point in the US economy. The main industries affected are interest rate sensitive manufacturing and real estate, and consumption will continue to be the biggest driving force of the economy. However, the fourth quarter is likely to be a turning point, as student loan repayments begin, energy prices rise and income growth expectations slow down, leading to cracks in the pillars of the US economy.
It is worth mentioning that the conference calls and performance guidance during the financial reporting season are also conveying signals. Brian Moynihan, CEO of Bank of America, warned that the strength of American consumers seems to be weakening. To be frank, the Federal Reserve has won the battle against American consumers - they are slowing down, and the question is whether anything will happen next
Some people, including former Merrill Lynch economist David Rosenberg and hedge fund tycoon Bill Ackman, have also warned that the "summer growth" in US economic activity is already fading. Rosenberg stated that the next step is the end of "soft landing" and the natural transition to "hard landing". Just like facing similar pressures in the autumn of 2000 and spring of 2007. Ackerman announced his short position in US Treasury bonds, believing that the slowdown in the US economy was more pronounced than data showed.
Erram told reporters that as long as overall inflation in the United States continues to decline, the Federal Reserve will choose to remain cautious. Because with interest rates at high levels, the Federal Reserve is paying attention to policy risks in both directions. Firstly, the success rate of a soft landing has not been high in history, but the example of the 1980s also shows that premature withdrawal from tightening is risky. The best position now is to wait and see what happens, avoid disrupting the economy with predetermined paths, take action only when there are data issues, and preserve policy selectivity.