Pre-market inventories: Don’t be fooled by a strong GDP report

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The impending recession is the topic of the day. From Goldman Sachs to the IMF, analysts and economists seem to agree that an economic slowdown is coming for the United States in early 2023. That’s why it’s so surprising that the U.S. economy is expected to show robust growth in Thursday’s third-quarter GDP report.

But investors should be wary of a positive overall figure. Economists warn the report could be a one-off wonder that overestimates the momentum of an economy that is actually slowing down.

What is happening: Gross domestic product, a broad measure of economic activity, rose 2.4% between July and September, according to Refinitiv. This is huge considering that we have just experienced six months of economic contraction.

This decline, coupled with persistent inflation and rising interest rates, led many to believe that the United States was recession-bound. A quarter of growth won’t necessarily change that, say economists who see it less as a saving grace and more as a pre-crisis bump.

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

Mortgage rates have more than doubled since the start of the year. The US dollar is now up almost 20% year over year against a basket of its six closest peers. (Its strength may hurt U.S. exports and U.S. corporate earnings overseas, which could weaken growth.) The federal budget deficit, meanwhile, has been cut in half, indicating a reduction in government spending. .

“There is more drag on the US economy than will be apparent in the third quarter GDP report,” Kelly wrote.

Unless the United States experiences a deep recession and subsequent recovery, or labor force participation rates and productivity suddenly soar, « there is little reason to expect growth thriving anytime over the next few years,” he added.

In addition, third quarter GDP should be lifted by a narrowing of the gap between exports and imports. But that’s because the United States imports fewer goods as demand dries up. If you lift the hood and look at the numbers, said Andrew Patterson, senior economist at Vanguard, you’ll see that the American consumer and businesses are actually spending less. It’s a bad sign.

The numbers will also be supported by an increase in retailer inventory levels, which are beginning to rebound from supply chain issues earlier in the year.

What the Fed is looking for: Investors will scan Thursday’s economic data for clues about the Fed’s interest rate decision at its policy meeting next week. Central bank officials will review the underlying metrics in the report and likely ignore the headlines, Patterson said.

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

Paterson says he expects inflation-adjusted household consumption numbers to have come down. « They can be downright negative, » he said.

The bottom line: Upturns in trade balances often wrongly inflate calculations of economic growth before a recession. Inflation-adjusted GDP reflected healthy gains early in four of the past six downturns, Joseph LaVorgna, chief economist at SMBC Nikko Securities America and former Trump White House economic adviser, wrote in a note.

The economy is not out of the woods, although Thursday’s headline GDP figure shows a rebound.

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

The short-term outlook for consumers remains « dismal, » said Lynn Franco, senior director of economic indicators at the Conference Board.

« Notably, concerns about inflation – which had receded since July – resumed, with gasoline and food prices being the main drivers, » Franco said in a statement. « Looking ahead, inflationary pressures will continue to weigh heavily on consumer confidence and spending, which could lead to a challenging holiday season for retailers. »

Consumer optimism has faded not only for the current economic period, but also for what may come in the coming months.

This does not bode well economically.

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 CEOs issue warnings of upcoming price hikes.

Kraft Heinz (KHC) CEO Miguel Patricio told CNN Business’ Christine Romans in a recent interview that rising inflation and supply issues are running through the food industry, prompting his company to keep raising prices.

“We have already increased the prices we expected this year, but I predict that next year inflation will continue, and therefore [we] will be further rounds of price increases,” Patricio said.

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

That’s not bad news for Coke, though. Rising coke prices helped boost its net income by 10% in the third quarter.