Thursday’s GDP report anticipated to point out the U.S. economic system at a crossroads

Economic progress probably slowed to its weakest tempo in a yr and a half to finish 2023, presumably setting the stage for a extra pronounced slowdown forward, based on Wall Street economists.

The consensus outlook for the fourth quarter is that gross home product grew at a 2% seasonally adjusted annualized tempo, slicing downward from the 4.9% in Q3 and the bottom studying because the 0.6% decline within the second quarter of 2022.

As the Commerce Department’s report hits Thursday morning, Wall Street’s consideration nearly instantly will flip to what the indicators are for progress going into 2024.

The report probably will “represent a sharp deceleration” from the earlier interval, Bank of America economist Shruti Mishra mentioned in a shopper notice. “Incoming data continue to point to a resilient, but cooling, U.S. economy, led by consumer spending on the back of a tight labor market, higher than expected holiday spending, and moderately strong balance sheets.”

BofA has a below-consensus view that GDP — the sum of all items and companies produced throughout the interval— will gradual to a 1.5% tempo, largely as a result of elements of the economic system in a roundabout way associated to client spending, reminiscent of nonresidential enterprise fastened funding and housing, will tail off.

In addition, the financial institution expects a slowdown in stock restocking to shave near a full proportion level off the headline quantity.

Looking ahead, Bank of America forecasts the primary quarter of 2024 to point out progress of simply 1%.

“Consumer spending is likely to slow from its current pace due to lagged effects from tighter financial conditions, higher energy prices, and cooling labor market,” Mishra mentioned.

Elsewhere on Wall Street, expectations are blended.

Goldman Sachs earlier this week lifted its This autumn estimate to 2.1%, a rise of 0.3 proportion level, taking its full-year GDP outlook to 2.8%. One important issue Goldman sees is stronger than anticipated state and native authorities spending, which boosted Q3 progress by practically a full proportion level and is predicted to point out a 4.5% improve within the last three months of the yr.

The financial institution’s economists additionally see progress holding up pretty effectively in 2024, ending the yr at 2.1%.

Two different key components will take the main focus as traders digest the GDP report: the state of client spending, which accounted for about two-thirds of all exercise in Q3, and inflation, particularly how the Federal Reserve would possibly react to non-public consumption costs that come out of Thursday’s report in addition to a separate Commerce Department launch Friday.

“We do expect the economy to slow … further in 2024 as the impact of monetary tightening continues to weigh on economic activities,” mentioned Joseph Brusuelas, chief economist at tax consultancy RSM. “However, we do not expect the economy to hit a recession.”

RSM expects the GDP report to point out a 2.4% acquire on strong progress in client spending, although some economists say December’s bigger than anticipated retail gross sales improve was fueled by seasonal distortions within the information that shall be corrected in January.

Citigroup agrees with the consensus name of two% progress in This autumn however sees harder occasions forward, primarily due to the lagged affect the Fed’s earlier will charge cuts will exert, in addition to inflation that would turn into extra sturdy than anticipated.

“Data released [Thursday] may in retrospect turn out to document the one quarter of true ‘Goldilocks’ conditions,” Citi economist Andrew Hollenhorst wrote. “But we do not share the market and Fed’s sanguine assessment of the macroeconomy over the remainder of the year.”