Don’t be fooled by the strong GDP report | CNN Business

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The impending recession is the topic of the day. From Goldman Sachs to the International Monetary Fund, analysts and economists seem to agree that an economic downturn is coming in the US in early 2023. That’s why it’s so surprising that the US economy showed solid growth in Thursday’s Q3 GDP report.

But investors should be wary of a positive headline number. Economists warn that the report may be one surprise Momentum is exaggerated in an economy that is already slowing.

What is happening: It is estimated that gross domestic product, a broad measure of economic activity, grew 2.4% between July and September, according to Refinitiv. This is huge considering we have six months of economic downturn.

This decline, along with persistent inflation and rising interest rates, has led many to believe that the United States has been constrained by a recession. A quarter of growth won’t necessarily change that, say economists who see this less as a boon for saving and more of a stumble before a recession.

“Going forward, growth may turn negative in the fourth quarter and is likely to be very weak over the next year,” David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a note Monday.

Mortgage rates have more than doubled since the beginning of the year. The US dollar is now up nearly 20% year over year when it is weighed against a basket of its six nearest peers. (Its strength could hurt US exports and overseas profits for US companies, which could dampen growth.) Meanwhile, the federal budget deficit has been halved, indicating lower government spending.

“There is more restraining force being imposed on the US economy than will ever be evident in the third quarter GDP report,” Kelly wrote.

Unless the US experiences a deep recession and subsequent recovery, or labor force participation rates and productivity suddenly spike higher, he added, “there is little reason to expect booming growth anytime over the next few years.”

Moreover, third-quarter GDP is likely to rise by narrowing the gap between exports and imports. But that’s because the United States is importing fewer goods as demand dries up. If you lift the lid and check the numbers, you’ll see that the American consumer and American businesses are actually spending less, said Andrew Patterson, chief economist at Vanguard. This is a bad sign.

The numbers will also be supported by increased retailer inventory levels, which began to recover from supply chain problems earlier in the year.

What the Federal Reserve is looking for: Investors will analyze economic data on Thursday for clues about the Federal Reserve’s interest rate decision at next week’s policy meeting. Patterson said central bank officials will look at key metrics in the report, and are likely to ignore key numbers.

Patterson said there are three categories in the report that the Fed will pay special attention to. The first is whether companies are investing in their future growth by buying things like new machinery. Next is residential investment, which measures home construction and remodeling and indicates a healthy housing market. The third is household consumption, which is a measure of how much money Americans spend on goods to meet their daily needs such as food and clothing.

Patterson says he expects inflation-adjusted home consumption numbers to fall. “It might be downright negative,” he said.

Bottom line: Realigning trade balances often leads to wrongly inflating accounts of economic growth before a recession hits. Inflation-adjusted GDP reversed healthy gains at the start of four of the last six downturns, Joseph LaVorgna, SMBC’s chief economist at Nico Securities America and a former White House economic adviser, wrote in a note.

The economy is not out of danger, even if Thursday’s key GDP figure showed a recovery.

US consumer confidence fell in October to its lowest level since July, as rising borrowing costs and high inflation weighed on household budgets, according to my colleague Alicia Wallace.

Lynne Franco, senior director of economic indicators at the Conference Board, said the short-term outlook among consumers remains “dreary.”

“In particular, concerns about inflation – which have been subsiding since July – are back again, with gas and food prices acting as major drivers,” Franco said in a statement. Looking ahead, inflationary pressures will continue to create strong headwinds for consumer confidence and spending, which could lead to a challenging holiday season for retailers.

Consumer optimism has waned not only for the current economic period but also for what could happen over the next several months.

This is not a great economic omen.

Numbers: The Consumer Confidence Index fell to 102.5 from a revised 107.8 in September, according to data released Tuesday by the Conference Board. Economists had expected a reading of 106.5, according to Refinitiv estimates. A reading above 100 indicates that consumers have an optimistic attitude towards the economy. In February 2020, the Consumer Confidence Index was 132.6.

Don’t expect things to get cheaper anytime soon. Top food and beverage executives are issuing warnings of future price hikes.

Miguel Patricio, CEO of Kraft Heinz (KHC), told CNN Business’s Christine Romanes in a recent interview that rising inflation and supply issues are stalking the food industry, prompting His company to continue to increase prices.

“We have already increased the prices we were expecting this year, but I expect inflation to continue next year, and as a result [we] “We will have another round of price increases,” Patricio said.

On Tuesday, Coca-Cola (KO) CEO James Quincey made similar comments. “There are going to be costs that are higher than the costs of normal inputs,” Quincy said on CNBC’s Squawk on the Street. So we expect prices to be higher than usual next year on top of what happened this year. ”

This is not bad news for Coca-Cola. Higher Coca-Cola prices helped lift its net revenue by 10% in the third quarter.

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