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The US economy appears to be in a growth recession — a
period of sluggish real growth.
We expect GDP growth to improve to sluggish rates of +0.6% in
the third quarter and +1.0% in the fourth quarter, following
declines in the first and second quarters that we estimate averaged
1.2%. We don't expect much improvement in growth in 2023, when we
project that GDP will rise 1.0% measured fourth-quarter-to-fourth
quarter.
Growth differs across sectors. Single-family housing is already
in what feels like a recession with sharp declines in permits,
starts, construction spending, and home sales. There is also
evidence of price declines in some markets.
Sectors such as spending on services other than housing-related
services are less susceptible to impacts from a sharp tightening of
financial conditions and will generally fare better.
The next rate hike
Elevated rates of inflation, exceptionally tight labor markets,
and ongoing supply issues will prompt the Federal Reserve to
continue tightening monetary policy to bring demand back in line
with supply.
We raised our expectation for interest rate policy by the Fed.
Hawkish remarks by Federal Reserve Chair Jerome Powell and other
participants on the Federal Open Market Committee (FOMC) strongly
suggest that a rate hike of 75 basis points is the most likely
outcome at the upcoming policy meeting on September 21.
Previously we indicated that the FOMC would consider a large
rate hike this month of either 50 or 75 basis points, with slightly
more weight on the possibility of the smaller option to avoid the
possibility of over-tightening after data suggested that inflation
has peaked.
An increase of 75 basis points would put the upper end of the
target range for the federal funds rate at 3¼%. This is consistent
with the upper end of the rate target rising to 4% by December,
which we anticipate will be the peak for this tightening cycle so
long as there is compelling evidence that inflation is moderating
substantially over the second half of this year.
Third-quarter outlook
Data arriving after the release of our updated base forecast on
September 6 suggested an even softer outlook for third-quarter GDP
growth.
We trimmed 0.7 percentage point from our forecast of
third-quarter GDP growth, from 1.3% to 0.6%. The largest
contributor to the downward revision was data on the composition of
goods exports. Although exports of goods surged 3.2% in real terms
in July, much of the strength was in exports of non-monetary gold,
which do not enter our tracking estimate for real exports as
counted within GDP.
Also contributing to the softer outlook for the third quarter
were data on services for the second quarter and a downward
revision to wholesale inventories in July relative to the "advance"
estimate issued in late August.
Other data out this week also reflect a mixed picture for
growth. The S&P Global US Services PMI Business Activity Index
fell to 43.7 in August, well below the modestly expansionary
reading for the US Manufacturing PMI of 51.5. Jobless claims remain
low, indicating ongoing strength and tightness in labor markets. A
weekly index of mortgage applications for home purchase fell in
early September to its lowest level since the week ending April 17,
2020.
This week's US economic releases:
Consumer price index (Sept. 13): We estimate a decline of 0.1%
overall.
Producer price index for final demand (Sept. 14): We estimate an
increase of 0.4%.
Retail and food services sales (Sept. 15): We estimate a decline
of 0.7%.
Industrial production (Sept. 15)
Consumer sentiment (Sept. 16): We estimate the University of
Michigan Consumer Sentiment Index rose 1.2 points to 59.4 in the
preliminary September reading as retail gasoline prices, a key
driver of sentiment, continued to fall through August and early
September.
Posted 12 September 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and
Ben Herzon, Executive Director, Research advisory specialty solutions, S&P Global Market Intelligence and
Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence
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.
