The U.S. economy is facing new dangers as a federal shutdown looms, strikes continue across the Midwest, rising energy costs and the expiration of pandemic-era financial support hit household budgets.
Economists say that combination risks hurting consumers and businesses as their resilience shows signs of collapsing under the pressure of rising interest rates, leading to the possibility of a sharp slowdown in economic growth later this year.
“There is a real chance that the economy will be much weaker in the fourth quarter than in the third quarter,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. He added that “many of the hits” would come “in the context of the lag effects of the Fed’s rate hikes.” arrival.
One unexpected headwind was a growing strike by Midwestern autoworkers against the nation’s three largest automakers. Industrial action shows little sign of resolution.
Another danger looms in Washington, where a U.S. government shutdown that could come as soon as this weekend will furlough hundreds of thousands of federal workers and delay the collection and release of data the Federal Reserve needs to fully assess the health of the economy.
Then, coronavirus pandemic-era student loan repayment relief and child care subsidies for providers are set to expire in early October, dealing another blow to financially vulnerable families and some consumer spending.
Goldman Sachs economists believe that the combination of these two factors may reduce annualized GDP growth to 1.3% in the fourth quarter, compared with 3.1% in the third quarter.
Goldman Sachs said the shutdown itself could reduce annualized growth by up to 0.2 percentage points per week on a quarterly basis, while the impact of strikes could be 0.1 percentage points per week. The resumption of student loan repayments is expected to hit the economy by 0.5 percentage points.
While the Federal Reserve has recently been optimistic about its U.S. economic outlook, economists are more pessimistic.
Analysts also pointed to the recent surge in oil prices, which are approaching $100 a barrel again after Russia and Saudi Arabia agreed to continue supply restrictions.
“At a time when incomes are once again being squeezed by rising fuel costs, continuing increases in borrowing costs and the resumption of student loan debt, I’m concerned that consumer spending will be sharp in the fourth quarter,” said James Knightley, chief international economist. Slow down.” at ING.
He warned that fourth-quarter GDP growth could “easily” turn negative unless the car strike and government shutdown are resolved quickly.
Despite the prospect of such a shock, most economists still think the United States can avoid recession, in large part because the labor market is performing much better than expected despite interest rates at a 22-year high.
According to economic forecasts compiled by Bloomberg, U.S. GDP growth will fall from a seasonally adjusted annualized rate of 3% in the third quarter to 0.5% in the last three months, before bottoming out at 0.1% in early 2024. The unemployment rate is expected to peak at just above 4%.
But economists worry that the foundations behind the unexpected strength of the U.S. consumer – the source of the U.S. economy’s unexpected resilience in recent months – are becoming more fragile, leaving the economy even more fragile.
Once buoyed by large amounts of excess savings, Americans expect to completely deplete those balances this quarter, the San Francisco Federal Reserve said. Delinquency rates for credit cards and auto loans are rising again. Small and medium-sized businesses are also feeling the pinch, with many reporting shrinking sales and little hope for improvement, according to a new quarterly survey from Morning Consult.
Another concern is what all these potential dangers could mean for U.S. inflation. Price pressures for most goods and services are likely to have declined from previous peaks, but overall remain well above the Fed’s 2% target.
Blerina Uruçi, chief U.S. economist at T Rowe Price, said she was concerned that higher energy prices would lead to higher costs elsewhere. An autoworker strike could also push up vehicle prices, given that supplies are already tight.
“A small shock to the economy can really push inflation back up again,” she said. “As a central banker, you would be worried if you continued to get these upward shocks, what would that do to inflation expectations?”
But a prolonged government shutdown would severely damage inflation and labor market clarity. For example, the Bureau of Labor Statistics will stop collecting, processing and publishing data until funding is restored.
That would complicate the Fed’s already difficult interest rate decision at its late October meeting. The central bank kept its policy rate at 5.25% to 5.5% this month and is debating whether its monetary policy is strict enough to keep inflation under control. But Fed Chairman Jerome Powell said officials would consider “all the data” in making the decision.
David Wilcox, who headed the Fed’s research and statistics division until 2018, said the Fed’s “vision is no longer perfect even if both eyes are functioning properly.” He added that operating without BLS data is tantamount to covering one eye.
“Monetary policy is a fraught business that can go wrong even in the best of times, but the economy is fragile right now and you really don’t want to make a difficult job more difficult.”
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