Consumers shop in Rosemead, California on December 12, 2023.
Frederic J. Brown | Afp | Getty Images
Economic growth is expected to have slowed to its weakest pace in a year and a half by the end of 2023, according to Wall Street economists, potentially setting the stage for a sharper slowdown in the future.
The consensus outlook for the fourth quarter is for gross domestic product to have grown at a seasonally adjusted annual rate of 2%, down from 4.9% in the third quarter and the lowest since the 0.6% decline in the second quarter of 2022 corresponds.
When the Commerce Department report arrives Thursday morning, Wall Street's attention will almost immediately turn to 2024 growth signs.
The report will likely represent “a sharp slowdown” from the previous period, Bank of America economist Shruti Mishra said in a note to clients. “Incoming data continues to point to a robust but cooling U.S. economy, led by consumer spending due to a tight labor market, higher-than-expected holiday spending and moderately strong balance sheets.”
BofA believes that GDP – the sum of all goods and services produced during this period – will decline at a pace of 1.5%, largely due to parts of the economy not directly linked to consumer spending related, such as living space, will decrease.
Additionally, the bank expects inventory replenishment to slow, with the total falling by almost a full percentage point.
Looking ahead, Bank of America forecasts growth of just 1% for the first quarter of 2024.
“Consumer spending is likely to slow from the current pace due to a delayed impact of tightening financing conditions, higher energy prices and slowdown in the labor market,” Mishra said.
Expectations on Wall Street are mixed.
Goldman Sachs earlier this week raised its fourth-quarter estimate to 2.1%, up 0.3 percentage points, and raised its full-year GDP outlook to 2.8%. A key factor Goldman sees is stronger-than-expected state and local spending, which boosted growth by almost a full percentage point in the third quarter and is expected to post a 4.5% increase in the final three months of the year.
The bank's economists also assume that growth will hold up quite well in 2024 and will be 2.1% for the year.
Two other key elements will be in focus as investors digest the GDP report: the state of consumer spending, which accounted for about two-thirds of all activity in the third quarter, and inflation, particularly how the Federal Reserve might respond to private consumption prices coming out Thursday's report and a separate Commerce Department release Friday.
“We expect the economy to slow further in 2024 as the impact of monetary tightening continues to weigh on economic activity,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “However, we do not expect the economy to fall into a recession.”
RSM expects the GDP report to show a 2.4% increase due to solid growth in consumer spending, although some economists say the larger-than-expected rise in retail sales in December is due to seasonal biases in the data, which will be corrected in January.
Citigroup agrees with the consensus call for 2% growth in the fourth quarter, but sees tougher times ahead, largely due to the lagged impact that the Fed's previous interest rate cuts will have, as well as inflation proving more durable than expected could.
“Data published [Thursday] “It may turn out in retrospect that this is a quarter of the true 'Goldilocks' conditions,” wrote Citi economist Andrew Hollenhorst. “But we do not share the market and the Fed’s confident view of the macroeconomics for the remainder of the year.”
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