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  • Shahid Bharucha

US economy October 2022 outlook

An informal recession?


Till now, economists have been discussing whether the world's strongest economy has entered a recession or not. The most recent report on growth figures is influencing their views on the economic slump by unveiling that the United States economy declined in the first six months. That marks two straight quarters of contraction, an informally coined recession. Despite the bleak outlook, most analysts believe the world's largest economy is not yet in a downturn, citing a solid and resilient American labor market. However, they are concerned that the country would edge into one as the Federal Reserve is at full throttle to battle inflation.

Key details

The latest economic scorecard released last Thursday by the Bureau of Economic Analysis shows that the U.S. economy contracted by 0.6% in the year's second quarter. This is unchanged from the previous estimate. Also, Gross domestic income, an alternative economic measure of production revenues and costs, was revised downward by $47.4 billion to $305.7 billion. The third and final growth figures painted an economy buffeted by strong headwinds and tailwinds. The latest numbers showed increased consumer spending, federal government expenditure, and business fixed investment. But these were offset by a decrease in exports and housing investment.

US GDP growth rates. Source: Trading economics

Consumer spending accounts for up to 70% of total economic activity in the United States, and outlays were slightly higher than previously reported in the year's first half. Spending increased at an inflation-adjusted annual rate of 2% in the second quarter and 1.3% in the first. What dragged the economy was a record trade deficit, the termination of most epidemic stimulus, and a dramatic drop in business spending, particularly on new inventory. The report's biggest surprise was a drop in gross domestic income, wages, and profits. Income growth, the inverse of spending growth, was reduced to 0.1% in the second quarter from 1.4% previously. Income growth was also reduced from 1.8% to 0.8% in the first quarter. That is most likely the result of growing inflation. Higher price pressures canceled out most income gains. Talking of inflation. The Fed's preferred inflation indicator, the Personal Consumption Expenditure Index, climbed 7.5% in the first quarter and 7.3% in the second. They had earlier been reported as 7.1% increases. That also shows slow momentum towards domestic spending going forward.

US PCE index. Source: Trading economics

Turning to the labor force, the job market has remained robust. Employers are creating 438,000 jobs per month on average this year, putting it on track to be the second-best hiring year (after 2021) in official data dating back to 1940. Unemployment is 3.7%, which is low by historical standards. There are around two jobs for every unemployed American.

US Unemployment Rate, Source: Trading economics

But, the Fed has raised interest rates five times this year, most recently on September 21, to control consumer prices, which were up 8.3% yearly in August despite falling gasoline costs. Also, many Fed officials cited that fighting inflation is their first priority, even at the cost of little economic pain and disturbance in labor markets. Adding to that, Fed Chair Jerome Powell stated last week, “We need to get inflation under control. I wish there were an easier way to do it. There aren't any." As a result, we expect a significant weakening of the U.S. economy, particularly in interest-rate-sensitive sectors such as housing and business investments.

US Interest Rate, Source: Trading economics

The risk of a recession, combined with continuously and painfully high prices, is a challenge for President Joe Biden's Democrats as they seek to keep control of Congress in the November midterm elections. However, price cuts in gasoline have lifted customers' moods in the last two months.

In a nutshell, consumers are holding up well, with high inflation, and the labor market remains quite strong despite dismal economic figures. Looking forward, Economists anticipate that GDP will return to growth in the third quarter, rising at a moderate 1.5% annual rate. But the risk of recession weighs more heavily now with more headwinds. Fed’s ongoing aggressive campaign, which, if it continues at the same pace, might tip the U.S. economy into recession early next year.

US dollar Index (DXY) and Stock markets

The dollar Index was going back toward levels not seen since May 2002 as of September 30, as the latest data, such as personal spending and core PCE inflation, came in beyond estimates. The dollar is on course for its fourth monthly gain and is 2.7% higher. Also, it's up over 10% this quarter, boosted by hopes that the Federal Reserve will remain active in combating inflation even if a recession is imminent. Last Wednesday, the Fed hiked interest rates by 75 basis points for the third consecutive meeting, predicting rates to peak at 4.6% next year with no cuts until 2024, delaying any dovish pivot that markets were anticipating in the near term.

US Dollar Index historical rates. Source: Trading economics

As central banks' aim to manage inflation through tighter monetary policy weighed on share prices, US stocks were on track for their longest streak of quarterly losses since the 2008 financial crisis. Investors digested a hotter-than-expected US inflation figure, reinforcing predictions that the Fed will need to act aggressively to control price growth. The Dow has lost about 5% this quarter and is on track for its third straight quarterly loss. The S&P 500 and Nasdaq were on track for their third consecutive quarterly loss for the first time since 2009, with both down 4% and 3%.

S&P 500 and Dow Jones historical prices. Source: Trading Economics


October's Economic Calendar

Monday 10/03/2022 – ISM Manufacturing PMI(Sep) | S&P Global Manufacturing PMI (Sep)

Tuesday 10/04/2022 – ADP Employment Changes (Sep) | ISM Services PMI (Sep) | S&P Global Service and Composite PMI (Sep) | Trade Balance (Aug)

Friday 10/07/2022 – Labor Force Participation Rate (Sep) | Nonfarm Payrolls (Sep) | Unemployment rate (Sep)

Monday 10/10/2022 – IMF Meeting

Tuesday 10/11/2022 – IMF Meeting | Budget Statement (Sep)

Wednesday 10/12/2022 – Producer Price Index Core (Sep) | FOMC Minutes

Thursday 10/13/2022 – Consumer Price Index (Sep)

Friday 10/14/2022 – Retail Sales (Sep) | Michigan Consumer Sentiment Index (Oct) PREL

Wednesday 10/19/2022 – Building Permits and Housing Starts (Sep)

Thursday 10/20/2022 - Philadelphia Fed Manufacturing Survey (Oct)

Monday 10/24/2022 – S&P Global Composite, Service and Composite PMI (Oct) (PREL) | Chicago Fed National Activity Index (Sep)

Tuesday 10/25/2022 – Consumer Confidence (Oct) | S&P/Case Shiller Home Price Index (Aug) | Housing Price Index (Aug)

Wednesday 10/26/2022 - Durable Goods Orders (Sep) | GDP Q3 | New Home Sales (Sep)

Thursday 10/27/2022 - PCE and Core PCE Q3 (PREL)

Friday 10/28/2022 – Personal Income (Sep) | Personal Spending (Sep) | Michigan Consumer Sentiment Index (Oct)

Monday 10/31/2022 – | Chicago PMI (Oct)

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