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US Weekly Economic Commentary: Growth recession

12 September 2022 Akshat Goel Ben Herzon Ken Matheny

The US economy appears to be in a growth recession — a period of sluggish real growth.

We expect GDP growth to improve to sluggish rates of +0.6% in the third quarter and +1.0% in the fourth quarter, following declines in the first and second quarters that we estimate averaged 1.2%. We don't expect much improvement in growth in 2023, when we project that GDP will rise 1.0% measured fourth-quarter-to-fourth quarter.

Growth differs across sectors. Single-family housing is already in what feels like a recession with sharp declines in permits, starts, construction spending, and home sales. There is also evidence of price declines in some markets.

Sectors such as spending on services other than housing-related services are less susceptible to impacts from a sharp tightening of financial conditions and will generally fare better.

The next rate hike

Elevated rates of inflation, exceptionally tight labor markets, and ongoing supply issues will prompt the Federal Reserve to continue tightening monetary policy to bring demand back in line with supply.

We raised our expectation for interest rate policy by the Fed. Hawkish remarks by Federal Reserve Chair Jerome Powell and other participants on the Federal Open Market Committee (FOMC) strongly suggest that a rate hike of 75 basis points is the most likely outcome at the upcoming policy meeting on September 21.

Previously we indicated that the FOMC would consider a large rate hike this month of either 50 or 75 basis points, with slightly more weight on the possibility of the smaller option to avoid the possibility of over-tightening after data suggested that inflation has peaked.

An increase of 75 basis points would put the upper end of the target range for the federal funds rate at 3¼%. This is consistent with the upper end of the rate target rising to 4% by December, which we anticipate will be the peak for this tightening cycle so long as there is compelling evidence that inflation is moderating substantially over the second half of this year.

Third-quarter outlook

Data arriving after the release of our updated base forecast on September 6 suggested an even softer outlook for third-quarter GDP growth.

We trimmed 0.7 percentage point from our forecast of third-quarter GDP growth, from 1.3% to 0.6%. The largest contributor to the downward revision was data on the composition of goods exports. Although exports of goods surged 3.2% in real terms in July, much of the strength was in exports of non-monetary gold, which do not enter our tracking estimate for real exports as counted within GDP.

Also contributing to the softer outlook for the third quarter were data on services for the second quarter and a downward revision to wholesale inventories in July relative to the "advance" estimate issued in late August.

Other data out this week also reflect a mixed picture for growth. The S&P Global US Services PMI Business Activity Index fell to 43.7 in August, well below the modestly expansionary reading for the US Manufacturing PMI of 51.5. Jobless claims remain low, indicating ongoing strength and tightness in labor markets. A weekly index of mortgage applications for home purchase fell in early September to its lowest level since the week ending April 17, 2020.

This week's US economic releases:

  • Consumer price index (Sept. 13): We estimate a decline of 0.1% overall.

  • Producer price index for final demand (Sept. 14): We estimate an increase of 0.4%.

  • Retail and food services sales (Sept. 15): We estimate a decline of 0.7%.

  • Industrial production (Sept. 15)

  • Consumer sentiment (Sept. 16): We estimate the University of Michigan Consumer Sentiment Index rose 1.2 points to 59.4 in the preliminary September reading as retail gasoline prices, a key driver of sentiment, continued to fall through August and early September.

Posted 12 September 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and

Ben Herzon, Executive Director, Research advisory specialty solutions, S&P Global Market Intelligence and

Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence


This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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