Recession alarm bells are sounding. But are they premature?
Yes, retail sales tumbled in December as inflation took its toll on consumers. The manufacturing sector is contracting. And several prominent CEOs are talking about the increased likelihood of a downturn during recent quarterly earnings conference calls.
But the United States economy still seems to be chugging along just fine after experiencing a hiccup in the first half of 2022.
We'll know more on Thursday, when the US Bureau of Economic Analysis provides its first estimate of gross domestic product (GDP) for the fourth quarter. GDP is the most comprehensive snapshot of economic activity, including consumer, business and government spending figures.
In last year's third quarter, the economy grew at an annualized rate of 3.2% following two quarters of declines in the first half of the year. So how did the economy do in last three months of 2022?
Despite worries about weaker consumer spending during the holidays, economists are forecasting solid growth for the fourth quarter. According to Refinitiv, economists surveyed by Reuters are predicting that the economy grew at an annualized rate of 2.6%.
That could wind up being a lowball projection. The closely watched GDPNow model from the Federal Reserve Bank of Atlanta estimates that GDP increased at a 3.5% clip in the fourth quarter.
Whichever estimate is closest, growth of around 3% for the second consecutive quarter is hardly something to sneeze at...and it certainly doesn't sound dire. But it's important to remember that GDP is backward looking. It provides no insights about where the economy is heading.
There are growing concerns on Wall Street that the Fed's aggressive series of interest rate hikes in 2022 will finally take their toll on the economy this year. There is typically a lag between when the Fed raises rates and changes in consumer behavior.
The housing market has already been hit as a result of the Fed's actions. Mortgage rates spiked last year, and that hurt home sales.
Consumer pullback in the cards? Many big companies in the tech, consumer and financial sectors are preparing for a downturn by cutting jobs. Mass layoffs could lead to a further pullback in retail sales, which in turn could push inflation pressures even lower, which the Fed clearly wants. But at what cost?
"With consumer spending representing approximately 70% of GDP, weakening retail sales can play a significant role in fighting inflation, but also challenge corporations that are likely to see declining sales and earnings," said José Torres, senior economist at Interactive Brokers, in a report.
Still, some experts continue to hold out hope that the US economy (and perhaps the global economy) can avoid a recession...or, `that if there is one, it will be shallow rather than deep.
The reasoning? The Fed now seems willing to do only small rate hikes...and the market is betting the Fed will pause later this year. What's more, oil prices have tumbled sharply from their peak last summer. That's good news for consumers and businesses.
One strategist also said that the Fed's seeming unwillingness to stop raising rates too soon is actually a good thing.
The Fed doesn't want to make the mistake of stopping too soon like it did during the 1980s inflation crisis. When the Fed did that, the US economy wound up having a so-called double-dip recession....a brief downturn followed by another more pronounced pullback in a series of just a few years.
"This FOMC is also loath to repeat the premature policy pivot that allows inflation to resurge, demanding even tighter monetary policy which creates a recession," said Katie Nixon, chief investment officer with Northern Trust Wealth Management, in a report. Nixon is forecasting a "soft landing" for the economy.
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