US Weekly Economic Commentary: Spending, production declines

Industrial production (IP) and retail sales both declined in November, consistent with our expectation that the US will soon tip into a recession.

IP fell in both October and November, with manufacturing IP down sharply in the latter month, reflecting declines in most industry groups. Retail sales fell in November, both overall and in the "core" measure that informs our estimate for personal consumption expenditures (PCE). November's declines followed increases in October and are still consistent with solid growth of PCE in the fourth quarter.

Nevertheless, they are consistent with our expectation that PCE growth will slow to a crawl early next year, as the economy rolls over into what we expect will be a mild recession with a peak-to-trough decline in GDP of less than 1%. The ensuing recovery will most likely get underway in the second half of 2023.

For the week, we trimmed our forecast of fourth-quarter GDP growth by 0.1 percentage point to 0.8% largely because of the decline in core retail sales in November and downward revisions in previous months. This was partially offset by an upward revision to the change of inventory investment in the fourth quarter suggested by a downward revision to retail inventory investment in the third quarter. We expect final sales to decline 0.1% in the fourth quarter.

Following a soft fourth quarter, we expect GDP growth to turn negative, with declines in both the first and second quarters of approximately 1% at annual rates. With recovery forecast to begin in the second half of the year, we project GDP growth next year of 0.3%, measured both on an annual average and four-quarter change basis.

Fed stays the course

Chair Powell and his policy-making colleagues at the Federal Reserve plan ongoing increases in interest rates despite tentative signs that inflation eased this fall.

In November, the overall and core CPIs rose 0.1% and 0.2%, respectively, in the latter case, the lowest monthly reading since August 2021. On Dec. 14, the Federal Open Market Committee (FOMC) raised the target for the federal funds rate by ½ percentage point to a range of 4¼% to 4½%. Fed policymakers generally expect to raise the funds rate target an additional 75 basis points before pausing.

Powell remained adamant, as we have noted, that he expects to maintain a significantly restrictive policy stance until incoming data support a high degree of confidence that inflation will fall to 2% on a sustained basis. Indeed, not a single FOMC participant expects to start cutting interest rates before 2024, in contrast to investor expectations that rate cuts could begin as early as next September.

We expect the upper end of the target range for the federal funds rate to rise to 5% in March and stay at that level until the second quarter of 2024. The actual trajectory of the funds rate, including its peak level, will be determined by inflation and inflation expectations. Projections from FOMC participants underscore risks to the outlook for interest rates tied to future developments with respect to inflation.

This week's economic releases:

• New residential construction (Dec. 20): We estimate 1,400 thousand units for housing starts in November. This would leave the pace of starts in line with a broadly softening trend, as single-family starts have weakened materially while multifamily starts have remained resilient. We estimate 1,504 thousand units for housing permits in November, continuing a downward trend.
• Existing home sales (Dec. 21): We estimate 4,124 thousand units for November, compared with 4,430 in October. This would continue what has been a sharply weakening trend, as low affordability has restrained demand.
• Conference Board's Leading Economic Index (Dec. 22): A downturn in November would extend a recent string of declines and would be consistent with our forecast of a recession beginning early in 2023.
• Durable goods orders (Dec. 23): We estimate that new orders for nondefense capital goods excluding aircraft — a good indicator of business fixed investment in equipment — fell 0.3% in November.
• Personal income and outlays (Dec. 23): We estimate a 0.6% increase in nominal personal income in November, compared with a 0.7% increase in October. For nominal personal consumption expenditures, we estimate an increase of 0.2% for November, compared with a 0.8% increase in October.
• New home sales (Dec. 23): We estimate new home sales of 600 thousand units in November, down from 632 thousand units in October and in line with a broadly weakening trend.
• Consumer confidence level (Dec. 21): We expect a level of 101.2 for December, compared with 100.2 in November, as softening prices provide some relief to consumers.
• Third-quarter GDP - third estimate (Dec. 22): Based on our processing of the source data that has been released since the second estimate about one month ago, we estimate 3.3% growth in the third quarter.

Please note: The Weekly Economic Commentary will not be posted on the blog the week of Dec. 26. Happy holidays!

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.