Cooler trends as summer turns to fall

Highlights from the Monthly Review for September 2023:

Consumer and hiring activity remained solid in the third quarter, which should keep economic growth positive until year end. But a growing number of households are reaching their spending limits, while rising interest rates and tighter lending standards are weighing on investment decisions by businesses — typical signals that an eventual recession is on the way.

Key Takeaways: 

Economic Review: Tailwinds for spending may be fading

Slower job growth and falling savings indicate that consumers may cut back on spending soon after a blowout summer. Still, the positive momentum for the consumer sector should carry into the fourth quarter, fed by elevated wage growth and service sector hiring. A renewed rise in energy prices pushed up inflation in August even as housing costs finally cooled. (pg. 2)

Financial Markets: Investors flee as the August heat blazes

The S&P 500 posted its first monthly decline since February, as worries build about third-quarter earnings where six in ten firms offered reduced forecasts. Adding to the investors’ dilemma was the uptick in interest rates influenced by a widening in the budget deficit. Oil was another thorn, with the price breaking out above $85 per barrel and winter heating fuel needs just around the corner. (pg. 3)

The Outlook: Job growth remains positive until the recession sets in

Stronger-than-expected job growth and the accompanying boost to consumer spending has been the primary driver of the extended expansion in 2023. While the hiring engine has slowed, the recent momentum for labor demand — with job openings still far surpassing unemployed workers and wages rising at a sturdy pace — should be enough to postpone a recession until early 2024.

The current pace of job gains is moderately above the average for the three months ahead of prior recessions and is poised to slow further in coming months, suggesting weaker spending trends ahead.

There are other headwinds for consumer activity, as excess pandemic savings look to be exhausted and student loan payments have restarted. These factors and the potential for a federal government shutdown in early October suggest a downshift in the fourth quarter, a likely precursor to even weaker growth in 2024.