Financial development is anticipated to have slowed barely within the fourth quarter however was nonetheless strong, pushed by a robust client.
Economists can be learning Thursday’s report on U.S. gross home product rigorously for indicators of how robust or weak the patron really was on the finish of 2022. Retail gross sales counsel spending fell off sharply because the 12 months got here to an finish. GDP is reported at 8:30 a.m. ET.
In line with Dow Jones, economists count on that U.S. gross home product grew by 2.8% within the fourth quarter, down from the 3.2% pace in the third quarter.
Whereas economists see a robust fourth quarter, they’re divided on the place the financial system goes from right here and a secret’s the patron. Some say the sharp 1.1% drop in December retail sales reveals the patron pulled again on the finish of the quarter, presumably a prelude to recession. Nevertheless, others say it is too quickly to rely the patron out, and the financial system may nonetheless keep away from a contraction.
“I do know the consensus view is recession is imminent, however I am skeptical of that,” mentioned Amherst Pierpont chief economist Stephen Stanley. If there’s a recession, he expects it will be extra seemingly in 2024. “I think we stumble through 2023.”
However Kevin Cummins, NatWest chief U.S. economist, mentioned he sees a recession on the horizon and he has penciled in a 1% decline in first-quarter GDP, after an estimated 3.2% acquire within the fourth quarter.
He mentioned the Federal Reserve’s fee hikes have a lagged impact on the financial system, they usually have already despatched housing into a recession. The slowdown in residential funding has taken a full share level off of development within the fourth quarter, he mentioned.
“Real export growth is going to be weak. Inventories have been rebuilt enough that you’re not going to get much juice from that,” he mentioned. “It just seems like all the major components in GDP are all on the same side going forward, pointing to weaker growth.”
Cummins mentioned the patron was nonetheless robust at first of the fourth quarter. “But the momentum since then has weakened pretty noticeably,” he mentioned. “It seems like there’s going to be a pretty big hole to dig out of where you ended the fourth quarter. So the first quarter is going to start pretty weak.”
KPMG’s chief economist Diane Swonk mentioned the patron slowed and so did the momentum within the financial system on the finish of the fourth quarter. She expects a shallow recession this 12 months.
“Fourth quarter-to-fourth quarter growth is about 0.8%. Year-over-year, it’s about 2%. We ended 2021 on such a strong note after almost 6% growth,” she mentioned. “Fourth quarter-to-fourth quarter is more about momentum, and that slowed despite the 4.5 million paychecks we created.”
The buyer powers two-thirds of the U.S. financial system so consumption is a significant swing think about GDP, which measures the worth of the ultimate items and providers produced within the U.S. financial system.
Michael Gapen, Financial institution of America chief U.S. economist, mentioned he has pushed again his view on when a recession may begin to the second quarter. He expects to see a still-strong client within the fourth quarter, including that the decline in December retail gross sales wasn’t an correct reflection of client spending, which can have been introduced ahead within the quarter.
“The signal should be consumption held up in the quarter. The open question is how much did personal spending fade into the end of the year. Was it just a goods story or was it a services story too?” Gapen mentioned. “That will feed your narrative of whether the slowdown has broadened.”
The Federal Reserve may also be watching to see how effectively the patron is holding up when the central financial institution meets subsequent week, Gapen mentioned. He expects it to lift its fed funds goal by one other quarter level.
“We’ve been saying in recent months that the slowdown should spread beyond housing and into manufacturing. … That signal is clear, and it makes sense to me. The signal around consumption has still been pretty good, and you can’t get a recession until consumption rolls over,” mentioned Gapen. “That’s why we need to see the composition of the data to see momentum at year-end.”
Stanley mentioned he thinks a recession can be postpone as a result of the patron will proceed to be robust and the employment outlook is nice.
“I think the economy in the short term proves more resilient. … There’s a big debate about how much of that cushion has been exhausted, but I think households are still sitting on a huge amount of liquid assets that they can spend,” Stanley mentioned. “I do not expect a recession this year. If we’re going to get one, it’s more likely to come in 2024, at which point households would have drawn down more of the pandemic cushion and you would have an extended period of a restrictive monetary policy.”
Some market strategists see a robust fourth quarter as one other signal the financial system may keep away from falling into recession, and a better-than-expected report may reinforce that view.
“I think it really starts to build a case for a soft landing, or if we have recession it’s a milder recession than what people were thinking in the past,” mentioned Jim Caron, head of macro methods for international fastened earnings at Morgan Stanley Funding Administration.