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The outlook for US GDP growth remains weak for the third quarter
and beyond.
We lowered our forecast of third-quarter GDP growth to a scant
0.4% (annual rate), largely because new and revised data on retail
sales through August suggested lower growth in personal consumption
expenditures (PCE).
Total retail and food services sales rose 0.3% in August. This
exceeded consensus expectations and followed a 0.4% decline in July
that was revised down from no change. During August, core sales
rose 0.2%, falling short of our expectations. Core sales were
revised up for June and down for July.
These developments imply more second-quarter PCE and less growth
of PCE and imports in the third quarter. In response, we raised our
tracking estimate of second-quarter GDP growth and lowered our
tracking forecast of third-quarter GDP growth.
We anticipate that PCE will rise at a 0.9% annual rate in the
third quarter. Several other components of GDP are likely to post
declines, including business and residential construction,
government consumption and gross investment, and inventory
investment. Weakness in those components will be offset by an
increase in real net exports that we anticipate will add nearly 2
percentage points to GDP growth in the third quarter.
Inflation
Falling gasoline prices kept the lid on overall consumer price
inflation in July and August.
Still, core inflation — which excludes some of the more
volatile items within the Consumer Price Index, like gasoline —
rebounded in August, boosted by large increases in rents and for
health and automotive insurance. Rent inflation (owners'
equivalent) on a 12-month basis rose to the highest in 36 years.
That is a setback for policymakers at the Federal Reserve who are
intent on lowering inflation.
Surveys point to some easing of consumers' inflation
expectations in response to the drop in gasoline prices. The
University of Michigan Consumer Sentiment Index rose 1.3 points to
59.5 in the preliminary September reading, up almost 10 points from
the record low in June of 50.0.
Rate expectations
The Fed will keep both feet planted firmly on the brakes to
lower inflation.
At this week's meeting, we expect the Federal Open Market
Committee to raise the target for the federal funds rate by 75
basis points to a range of 3% to 3¼%, which would put the upper end
of the target range on track to reach 4% later this year.
The balance of risks is tilted toward an even higher peak funds
rate target unless inflation moderates substantially over the next
several months. Trading in futures and overnight index swaps
reflects investors' expectations that the federal funds rate could
reach 4½% by next spring.
Fourth-quarter outlook
GDP growth is likely to improve modestly in coming quarters,
even as tight financial conditions, the waning impacts of past
fiscal stimulus, and a weak global backdrop restrain demand and
limit real growth.
We expect GDP growth to inch up to 1.0% in the fourth quarter
and to match that pace over the four quarters of next year. (On an
annual-average basis, we expect GDP growth to fall from 1.7% this
year to 0.9% in 2023.)
This week's US economic releases:
Housing starts: We estimate 1,474 thousand
units. This would follow a cumulative decline over the prior three
months of approximately 20%, leaving the pace of starts well below
averages from earlier this year.
Existing home sales: We estimate 4,646 thousand
units. This would continue a sharply weakening trend that began
early this year and would leave the pace of sales at levels last
seen in summer 2020. Prior to the COVID-19 recession, existing home
sales had not been as low as 4,680 thousand in approximately 10
years.
Conference Board's Leading Economic Index:
Prior to August, the index has declined for five consecutive
months. Even a flat result for August would indicate risk for the
economy over the next several months.
Posted 19 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.
