US Weekly Economic Commentary: More resiliency

Data this week on orders and shipments reflect a degree of resiliency in the capital-goods sector despite a pronounced tightening of financial conditions for most of this year, including substantially higher borrowing costs and appreciation in the foreign exchange value of the dollar.

Orders for capital goods rose 2.1% overall in October, while the "core" measure for orders of nondefense capital goods excluding aircraft rose 0.7%. Year-to-date, overall and core orders for capital goods have risen 15.3% and 5.8%, respectively.

Strength in these components alongside increases in shipments supported upward revisions to our near-term projections for exports of capital goods and business investment in equipment. Our latest tracking estimates show business equipment spending rising at a 4.4% annual rate in the fourth quarter after 10.1% growth in the third quarter.

Resiliency is also a feature of consumer spending, as we have noted previously: Consistent with strength in monthly data on retail sales, we expect personal consumption expenditures to grow at a 3.0% annual rate in the fourth quarter.

GDP forecast revised up

Last week we revised up our forecast of fourth-quarter GDP growth by 0.4 percentage point to a 0.8% annual rate, reflecting sizeable increases in orders and shipments of capital goods.

Inventories of nondurable goods surged in October and were higher than expected, supporting an upward revision to our forecast for inventory investment in the fourth quarter.

A degree of resiliency in both consumer spending and the capital goods sector and a partial easing in financial conditions in recent weeks have dimmed the prospects for a recession beginning as soon as the fourth quarter.

However, a recession in coming quarters is still more likely than not. Even with recent easing, the cumulative tightening of financial conditions this year is substantial. More tightening is on the way supported by more Fed rate hikes, fiscal support to growth has evaporated, and the global growth outlook is soft. We expect a mild recession, albeit beginning around the end of the year, slightly later than previously anticipated, and continuing to approximately the middle of 2023.

The path to 2%

The determination by policymakers to put inflation on a path to recede to its 2% longer-run target will keep the Fed in a tightening mode for the next few months, and it is likely to maintain a significantly restrictive policy stance for a considerable time even after it pauses rate hikes.

We expect the Federal Open Market Committee (FOMC) will hike interest rates by 50 basis points on Dec. 14, with additional rate hikes in early 2023 that will bring the target for the federal funds rate to a peak range of 4¾% to 5%. To the extent that financial conditions ease in response to market developments, the Fed could be forced to hike interest rates further than currently anticipated.

Fed funds futures also reflect expectations that the FOMC will hike by 50 basis points in December. Relative to our assumption, the price in a slightly higher peak funds rate target range of 5% to 5¼%. Futures "expect" rate cuts in the second half of 2023. In our view, an early Fed reversal to cutting interest rates is unlikely.

This week's economic releases:

• Conference Board Consumer Confidence Index (Nov. 29): We estimate 99.6 for November, compared with 102.5 for October.
• Personal income and outlays (Nov. 30): We estimate nominal personal income rose 0.6% in October, and nominal personal consumption expenditure rose 0.9%. The latter would follow a string of (mostly) robust increases that has been largely, but not fully, accounted for by rising consumer prices.
• Nominal goods deficit (Nov. 30): We estimate the nominal goods deficit narrowed in October by $1.2 billion to $90.7 billion.
• Construction spending (Dec. 1): We estimate nominal construction spending fell 0.3% in October. This would be despite rapidly rising prices in the construction sector and would signal ongoing weakness in real construction activity.
• Light vehicle sales (Dec. 2): We estimate the annualized pace of light vehicle sales was 14.3 million units for November. Sales are improving as inventories at retail dealerships are rising.
• Nonfarm payroll employment (Dec. 2): Data has shown a slowing trend in payroll gains over roughly the last year.
• Q3 GDP - second estimate (Nov. 29): We estimate GDP rose at a 3.6% annual rate in the third quarter, based on our read of the source data that have been released over the last month. This would be up from BEA's advance estimate of 2.6% growth.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.