US Weekly Economic Commentary: Recession still likely

Incoming data last week, including a large increase in payroll employment in October, point to an economy that expanded even more than previously estimated in the third quarter.

That expansion occurred with slightly more momentum in employment and final demand for the hand-off to the fourth quarter than it previously appeared. Nevertheless, demand has softened, and we continue to expect a weak fourth quarter with GDP contracting slightly, marking the start of a recession before the end of the year.

Data published last week on construction, trade, and labor income suggested both more GDP growth in the third quarter than the Bureau of Economic Analysis estimated and a smaller decline of GDP in the fourth quarter than we previously projected. Construction spending rose in September and recent levels were revised up. The trade deficit widened in September but by less than expected as exports through September were stronger than previously indicated.

Those two factors largely accounted for an upward revision to our estimate of third-quarter GDP growth of 0.5 percentage point to 3.1%. (Final sales to private domestic purchasers, by our estimate, rose at just a 0.3% rate in the third quarter, a better indicator of underlying softness in demand.) Construction data also contributed to an upward revision to our estimate of fourth-quarter GDP.

In addition, payroll employment rose by 261 thousand in October, more than expected and suggesting, along with data on average hourly earnings, more growth in private wages and salaries that support growth in consumer spending. For the week, we raised our forecast of fourth-quarter GDP growth by 0.4 percentage point, to a 0.3% annualized decline. Volatile data on trade and inventories could upend that forecast in either direction.

Forecast updated

We've revised up our projection of real GDP growth in 2023 from -0.5% to -0.2%. The base forecast still includes a mild recession starting late in the fourth quarter of this year, with an anemic recovery taking hold in third quarter of next year. We project GDP to grow a below-trend 1.3% in 2024.

With GDP declining in 2023 and growing below trend in 2024, the unemployment rate rises to 5.7% by late 2023 before declining to 4.4% by 2027.

On Nov. 2, the Federal Open Market Committee (FOMC) raised the target for the federal funds rate by ¾ percentage point for the fourth consecutive time, lifting it to a range of 3¾% to 4%. Policymakers discussed plans for slowing the pace of rate hikes. According to the Chair, they made no explicit promise to do so as soon as the next scheduled meeting on Dec. 14.

Powell stressed that inflation continues to exceed policymakers' expectations, and it is possible that the FOMC will ultimately raise interest rates to a higher level than many policymakers expected as recently as September.

We revised our monetary policy assumptions to show the Fed raising its policy rate to the range of 4.75% - 5.00% by March of 2023, and not reversing course until May of 2024.

This week's economic releases:

• Consumer price index (Nov. 10): We estimate a 0.6% increase for total CPI October, and 0.4% increase for core CPI, which excludes the direct effects of changes in food and energy prices. Stubbornly high rates of inflation will prompt the Fed to continue to hike interest rates through March of next year.
• University of Michigan Consumer Sentiment Index (Nov. 11): We estimate a preliminary November reading of 59.6, down slightly from 59.9 in October. Inflation and concerns about a recession are major sources of drag on sentiment.

Posted 07 November 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and

Ben Herzon, US Economist, Insights and Analysis, S&P Global Market Intelligence and

Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence and

Lawrence Nelson, Senior US Economist, 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.