Pre-Market Stocks: Don’t be fooled by a strong GDP report

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Today’s topic is immediate recession. From Goldman Sachs to the IMF, analysts and economists seem to agree that an economic recession will hit the United States in early 2023. That’s why it’s so surprising that the US economy is expected to show strong growth in Thursday’s third-quarter GDP report.

But investors should be wary of a positive headline number. Economists cautioned that the report could be a one-hit wonder the momentum of a slowing economy is too much.

What’s happening: Gross domestic product, a broad measure of economic activity, is estimated to have grown by 2.4% between July and September, according to Refinitiv. That’s huge considering we’ve just had six months of economic contraction.

This decline, along with persistent inflation and rising interest rates, led many to believe that the US was headed for recession. A quarter of growth won’t necessarily change that, say economists who see this less as a saving grace and more of a bump before the recession.

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

Mortgage rates have more than doubled since the beginning of the year. The US dollar is up nearly 20% year-to-date when weighed against a basket of its six closest peers. (Its strength could hurt US exports and the foreign earnings of US companies, which could weaken growth.) The federal budget deficit, meanwhile, has been cut in half, indicating a reduction in government spending.

“The third quarter of GDP is putting more braking power on the US economy than will be evident in the GDP report,” Kelly wrote.

Unless the United States experiences a deep recession and subsequent recovery, or labor force participation rates and productivity suddenly rise, “there’s not much reason to expect an increase in the coming years,” he added.

Also, third quarter GDP is likely to rise due to a narrowing of the gap between exports and imports. But that’s because the United States is importing fewer goods as demand dries up. If you lift the hood and look at the numbers, said Andrew Patterson, a senior economist at Vanguard, you’ll see that American consumers and businesses are actually spending less. That’s a bad sign.

The numbers will also be boosted by increased inventory levels at retailers as they begin to recover from supply chain issues earlier this year.

What the Fed is looking for: Investors will look to Thursday’s economic data for clues about the Fed’s interest rate decision at next week’s policy meeting. Central bank officials will look at the underlying metrics in the report, and are likely to reject the headline numbers, Patterson said.

There are three categories in the report that the Fed will pay special attention to, Paterson said. The first is where companies invest in future growth by buying things like new machinery. Next is housing investment, which measures home construction and remodeling and indicates a healthy housing market. The third is household consumption, which measures how much money Americans spend on goods to meet their daily needs, such as food and clothing.

Paterson says he expects inflation-adjusted household consumption figures to decline. “They can be completely negative,” he said.

Bottom line: Changing trade balances often falsely inflate estimates of economic growth before a recession. Inflation-adjusted GDP reflected healthy gains around the start of four of the past six recessions, Joseph LaVorgna, chief economist at SMBC Nikko Securities America and a former Trump White House economic adviser, wrote in a note.

The economy is not out, even though Thursday’s GDP numbers show a rebound.

US consumer confidence fell to its lowest level since July in October as high borrowing costs and rising inflation weighed on household budgets, colleague Alicia Wallace reported.

The short-term outlook for consumers remains “difficult,” said Lynn Franco, chief economic officer at the Conference Board.

“Notably, concerns about inflation — which had been retreating since July — rose again, with gas and food prices as the main drivers,” Franco said in a statement. “Going forward, inflationary pressures will continue to create headwinds for consumer confidence and spending, which could create a challenging holiday season for retailers.”

The level of consumer optimism decreased not only for the current economic period but also for what could come in the coming months.

That’s not a great economic forecast.

Numbers: The Consumer Confidence Index fell to 102.5 from a revised 107.8 in September, according to data released by the Conference Board on Tuesday. Economists had expected a reading of 106.5, according to Refinitiv estimates. A reading above 100 indicates that consumers are optimistic about the economy. In February 2020, the consumer confidence index was 132.6.

Don’t expect things to get cheaper anytime soon. Food and beverage CEOs are issuing warnings about impending price hikes.

Kraft Heinz ( KHC ) CEO Miguel Patricio told CNN Business’ Christine Romans in a recent interview that the food industry is facing higher inflation and supply issues, resulting in for his company to keep raising prices.

“We have already increased the prices we expected this year, but I predict that inflation will continue next year, and as a result [we] the price increase will have other rounds,” said Patricio.

On Tuesday, Coca-Cola ( KO ) CEO James Quincey made similar comments. “It’s going to be above normal input costs,” Quincey said on CNBC’s Squawk on the Street. “So we expect prices to be ahead of normal next year in addition to what happened this year. ”

That’s not all bad news for Coke, though. Higher Coke prices helped its net income rise 10% in the third quarter.