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GDP report might present strong fourth-quarter development however nonetheless sign a recession is coming, economists say

Financial development is anticipated to have slowed barely within the fourth quarter however was nonetheless strong, pushed by a powerful client.

Economists will likely be finding out Thursday’s report on U.S. gross home product rigorously for indicators of how robust or weak the buyer really was on the finish of 2022. Retail gross sales counsel spending fell off sharply because the yr got here to an finish. GDP is reported at 8:30 a.m. ET.

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In line with Dow Jones, economists count on that U.S. gross home product grew by 2.8% within the fourth quarter, down from the three.2% tempo within the third quarter.

Whereas economists see a powerful fourth quarter, they’re divided on the place the financial system goes from right here and a secret’s the buyer. Some say the sharp 1.1% drop in December retail gross sales exhibits the buyer pulled again on the finish of the quarter, presumably a prelude to recession. Nonetheless, others say it is too quickly to rely the buyer out, and the financial system might nonetheless keep away from a contraction.

“I do know the consensus view is recession is imminent, however I am skeptical of that,” stated Amherst Pierpont chief economist Stephen Stanley. If there’s a recession, he expects it will be extra doubtless in 2024. “I believe we stumble via 2023.”

However Kevin Cummins, NatWest chief U.S. economist, stated he sees a recession on the horizon and he has penciled in a 1% decline in first-quarter GDP, after an estimated 3.2% achieve within the fourth quarter.

He stated the Federal Reserve’s fee hikes have a lagged impact on the financial system, and so they have already despatched housing right into a recession. The slowdown in residential funding has taken a full share level off of development within the fourth quarter, he stated.

“Actual export development goes to be weak. Inventories have been rebuilt sufficient that you just’re not going to get a lot juice from that,” he stated. “It simply looks as if all the main elements in GDP are all on the identical facet going ahead, pointing to weaker development.”

Cummins stated the buyer was nonetheless robust at first of the fourth quarter. “However the momentum since then has weakened fairly noticeably,” he stated. “It looks as if there’s going to be a fairly large gap to dig out of the place you ended the fourth quarter. So the primary quarter goes to start out fairly weak.”

KPMG’s chief economist Diane Swonk stated the buyer slowed and so did the momentum within the financial system on the finish of the fourth quarter. She expects a shallow recession this yr.

“Fourth quarter-to-fourth quarter development is about 0.8%. 12 months-over-year, it is about 2%. We ended 2021 on such a powerful notice after nearly 6% development,” she stated. “Fourth quarter-to-fourth quarter is extra about momentum, and that slowed regardless of the 4.5 million paychecks we created.”

The patron powers two-thirds of the U.S. financial system so consumption is a serious swing consider GDP, which measures the worth of the ultimate items and providers produced within the U.S. financial system.

Michael Gapen, Financial institution of America chief U.S. economist, stated he has pushed again his view on when a recession may begin to the second quarter. He expects to see a still-strong client within the fourth quarter, including that the decline in December retail gross sales wasn’t an correct reflection of client spending, which can have been introduced ahead within the quarter.

“The sign must be consumption held up within the quarter. The open query is how a lot did private spending fade into the tip of the yr. Was it only a items story or was it a providers story too?” Gapen stated. “That may feed your narrative of whether or not the slowdown has broadened.”

The Federal Reserve may also be watching to see how properly the buyer is holding up when the central financial institution meets subsequent week, Gapen stated. He expects it to boost its fed funds goal by one other quarter level.

“We have been saying in latest months that the slowdown ought to unfold past housing and into manufacturing. … That sign is evident, and it is smart to me. The sign round consumption has nonetheless been fairly good, and you may’t get a recession till consumption rolls over,” stated Gapen. “That is why we have to see the composition of the info to see momentum at year-end.”

Stanley stated he thinks a recession will likely be delay as a result of the buyer will proceed to be robust and the employment outlook is nice.

“I believe the financial system within the brief time period proves extra resilient. … There is a huge debate about how a lot of that cushion has been exhausted, however I believe households are nonetheless sitting on an enormous quantity of liquid belongings that they’ll spend,” Stanley stated. “I don’t count on a recession this yr. If we’ll get one, it is extra prone to are available 2024, at which level households would have drawn down extra of the pandemic cushion and you’ll have an prolonged interval of a restrictive financial coverage.”

Some market strategists see a powerful fourth quarter as one other signal the financial system might keep away from falling into recession, and a better-than-expected report might reinforce that view.

“I believe it actually begins to construct a case for a comfortable touchdown, or if we’ve recession it is a milder recession than what folks have been considering previously,” stated Jim Caron, head of macro methods for international mounted revenue at Morgan Stanley Funding Administration.

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