Thursday's GDP report is expected to show the US economy at a crossroads

Consumers shop in Rosemead, California on December 12, 2023.

Frederick J. Brown | Afp | Good pictures

According to Wall Street economists, economic growth could slow to its weakest pace in the year and a half ending in 2023.

The consensus outlook for the fourth quarter was for GDP to grow at a seasonally adjusted annual pace of 2%, down from 4.9% in Q3 and the slowest pace since a 0.6% decline in the second quarter of 2022.

With the U.S. Commerce Department's report due Thursday morning, Wall Street's attention will immediately turn to what the signs are for growth in 2024.

Bank of America economist Shruti Misra said in a client note that the report „signals a steeper decline” than the previous period. „Incoming data continue to point to a resilient, but cooling, U.S. economy led by consumer spending, expected holiday spending and moderately strong balance sheets on the back of a tight labor market.”

BofA expects GDP — the sum of all goods and services produced during the period — to decline at a 1.5% pace because some parts of the economy are not directly related to consumer spending, such as non-residential business fixed investment and housing, wall off.

Additionally, the bank expects a slowdown in inventory recovery to shave close to a full percentage point off the headline number.

Looking ahead, BofA predicts growth of just 1% in the first quarter of 2024.

„Consumer spending is likely to decelerate from its current pace due to the lagged effects of tighter fiscal conditions, higher energy prices and a cooling labor market,” Misra said.

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Elsewhere on Wall Street, expectations are mixed.

Goldman Sachs earlier this week raised its Q4 estimate to 2.1%, up 0.3 percentage points, and took its full-year GDP outlook to 2.8%. One significant factor Goldman sees is stronger-than-expected state and local government spending, which lifted Q3 growth by nearly a full percentage point and is forecast to show a 4.5% increase in the final three months of the year.

The bank's economists see growth picking up in 2024, ending the year at 2.1%.

Two other key components will be in focus as investors digest the GDP report: the level of consumer spending, which was about two-thirds of activity in Q3, and inflation, particularly how the Federal Reserve will react to personal consumption prices coming in Thursday's report and a separate business sector report released Friday.

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

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RSM expects the GDP report to show a 2.4% gain on solid growth in consumer spending, despite some economists saying in December. Retail sales are higher than expected Triggered by seasonal distortions in January corrected data.

Citigroup agrees with the consensus call for 2% growth in Q4, but expects tougher times ahead, mainly due to the lagged effect of the Fed's previous rate cuts and inflation likely to turn out to be more persistent than expected.

„Data released [Thursday] A quarter could document true 'Goldilocks' conditions,” Citi economist Andrew Hollenhorst wrote. „But we don't share the market and Fed's assessment of the macroeconomic outlook for the rest of the year.”

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