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Recession alarm bells are ringing. But are they premature?
Yes, retail sales fell in December as inflation weighed on consumers. The manufacturing sector has a contract. And several prominent CEOs have been talking about the increased likelihood of a downturn during recent quarterly earnings calls.
But it looks like the US economy is still going strong after suffering in the first half of 2022.
We will know more on Thursday, when the US Bureau of Economic Analysis provides its first estimate of gross domestic product (GDP) for the fourth quarter. GDP is the most comprehensive snapshot of economic activity, including consumer, business and government spending figures.
In the third quarter of last year, the economy grew at an annual rate of 3.2% after two quarters of decline in the first half of the year. So how did the economy fare in the last three months of 2022?
Despite concerns about weaker consumer spending during the holidays, economists are forecasting strong growth for the fourth quarter. According to Refinitiv, economists surveyed by Reuters are predicting that the economy grew at an annual rate of 2.6%.
That could end up being a low ball projection. The closely watched GDPNow model from the Federal Reserve Bank of Atlanta estimates that GDP grew at a 3.5% clip in the fourth quarter.
Whichever estimate is closest, growth of around 3% for the second quarter in a row is hardly something to sneeze at… But it’s important to remember that GDP is backward looking. It gives no insight into where the economy is going.
Wall Street is growing concerned that the Fed’s aggressive series of interest rate hikes in 2022 will take its toll on the economy this year. There is usually a lag between when the Fed raises rates and changes in consumer behavior.
The housing market has already been hit as a result of the Fed’s actions. Mortgage rates rose last year, hurting home sales.
Many large companies in the technology, consumer and financial sectors are preparing for the downturn by cutting jobs. Mass layoffs could lead to a further pullback in retail sales, which could push inflationary pressures even lower, which the Fed clearly wants. But at what cost?
“With consumer spending representing around 70% of GDP, the weakening of retail sales can play a significant role in fighting inflation, but also challenge corporations that are likely to reduce sales and earnings,” said José Torres, senior economist at Interactive Brokers, in a. report.
However, some experts remain hopeful that the US economy (and possibly the global economy) can avoid a recession…or, if there is one, it will be shallow rather than deep.
The reasoning? The Fed now seems willing to do only small rate hikes … and the market is betting that the Fed will stop later this year. In addition, oil prices have fallen significantly since last summer’s peak. That’s good news for consumers and businesses.
One strategist also said the Fed’s reluctance to stop raising rates too soon is a good thing.
The Fed does not want to stop the mistake too soon as it did during the inflationary crisis of the 1980s. When the Fed did that, the US economy ended up in a so-called double dipping recession….a short downturn followed by a more significant pullback in a series of a few years.
“This FOMC also hates the premature policy pivot that allows inflation to rebound, calling for even tighter monetary policy that creates a recession,” Katie Nixon, chief investment officer at Northern Trust Wealth Management, said in a report. Nixon is predicting a “soft landing” for the economy.
More blue chip companies will report fourth quarter results (and possibly provide guidance for the first quarter of 2023 and beyond) this week. Tech titans are taking center stage.
To date, the lion’s share of earnings has come from large banks. The heads of those financial firms were cautious. High-tech executives may also have a muted attitude.
Elon Musk’s Tesla is on tap to report earnings, and the electric car giant has already started cutting prices on many of its electric vehicles around the world as demand declines.
Software giant Microsoft (MSFT), which announced layoffs last week, will also report earnings. So will chip leaders Texas Instruments (TXN) and Intel (INTC), as well as IBM (IBM).
Investors will be looking for signs of stability in the turbulent technology sector. Maybe they don’t like what they hear.
The so-called FAANGs were market leaders, but they all faded in 2022 due to concerns about slowing earnings growth and a weakened economy, announced Facebook owner Meta Platforms, Amazon ( AMZN ) and Google parent Alphabet (GOOGL), recently. job cuts as well.
Solid results from Netflix (NFLX) last week may offer some hope that the worst may soon be over. But according to FactSet senior earnings analyst John Butters, the tech sector’s earnings are expected to fall nearly 10% in the fourth quarter compared to the fourth quarter of 2021.
Microsoft, IBM and Intel, all in the Dow, are among the highlights on the earnings calendar. But the Dow components aren’t the only ones reporting earnings this week. In fact, a dozen of the 30 Dow members will release their latest results.
Also on tap? Verizon (VZ), Johnson & Johnson (JNJ), Travelers (TRV), 3M (MMM), Boeing (BA), Dow (DOW), Visa (V), Chevron (CVX) and American Express (AXP).
Monday: Markets in China and Korea were closed all week; earnings from Baker Hughes (BKR), Synchrony (SYF) and Logitech (LOGI)
Tuesday: Europe and UK flash PMI; German consumer confidence earnings from Verizon, Johnson & Johnson, GE (GE), Lockheed Martin (LMT), Raytheon (RTN), Travelers, 3M, DR Horton (DHI), Union Pacific (UNP), Halliburton (HAL), Microsoft , Capital One (COF) and Texas Instruments
Wednesday: Canada rate determination; German business climate index; earnings from AT&T (T), Boeing, Abbott Labs (ABT), Tata (TTM), US Bancorp (USB), Kimberly-Clark (KMB), Norfolk Southern (NSC), Tesla, IBM, CSX (CSX) and Ameriprise ( AMP)
Thursday: US Q4 GDP; United States weekly jobless claims; US new home sales; US durable goods orders; GDP of South Korea; earnings from Valero (VLO), Comcast (CMCSA), Archer-Daniels (ADM), American Airlines (AAL), Dow, Northrop-Grumman (NOC), SAP (SAP), Southwest (LUV), Mastercard (MA), Sherwin -Williams (SHW), Tractor Supply (TSCO), Blackstone (BX), Alaska Air (ALK), JetBlue (JBLU), Intel and Visa
Friday: US personal income and expenditure; US PCE inflation; US US consumer sentiment of Michigan; US pending domestic sales; China’s industrial profits; earnings from Chevron, HCA (HCA), American Express, LG (LPL), Charter Communications (CHTR) and Colgate-Palmolive (CL)