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Rising headwinds threaten US economy’s resilience

The US economy is facing new peril as a federal government shutdown draws near, strikes in the US Midwest rumble on, and rising energy costs coupled with the expiry of pandemic-era fiscal support hit household budgets.

The combination threatens to undermine consumers and businesses just as their resilience shows signs of cracking under the weight of higher interest rates, making a sharp slowdown in growth likely later this year, economists say.

“There’s a real chance that the economy is way weaker in the fourth quarter than in the third quarter,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. The “multitude of hits” would all arrive “against the background of the lagged effects of the Fed’s rate hikes”, he added.

One unexpected headwind is the widening autoworker strike in the Midwest against the top three domestic carmakers. The labour action shows little sign of resolution.

Another danger stems from Washington, where a US government shutdown — likely as soon as this weekend — would put hundreds of thousands of federal workers on furlough, while also delaying the collection and publication of data needed by the Federal Reserve to fully assess the economy’s health.

This would be followed at the start of October by the expiry of coronavirus pandemic-era relief for student loan repayments and childcare subsidies for providers — another hit to financially vulnerable households and to some consumers’ spending.

The combination could bring annualised GDP growth down to 1.3 per cent in the fourth quarter, compared with 3.1 per cent in the third quarter, reckon economists at Goldman Sachs.

The government shutdown on its own could shave up to 0.2 percentage points from quarterly annualised growth for each week it lasts, Goldman says, while the impact of the strikes could be 0.1 percentage points per week. The resumption of student loan repayments is forecast to deliver a 0.5 percentage point blow.

The gloomier mood from economists comes despite the Fed’s more recent optimism about its outlook for the US economy.

Analysts have also pointed to the recent surge in oil prices, which are nearing $100 a barrel again after Russia and Saudi Arabia agreed to keep restricting supply.

“At a time when incomes are being squeezed again by higher fuel costs, the ongoing increases in borrowing costs and student loans restarting, I am concerned that we will see consumer spending slow rapidly in the fourth quarter,” said James Knightley, chief international economist at ING.

Unless there is a swift resolution to the auto strikes and the government shutdown, fourth-quarter GDP growth could “easily” turn negative, he cautioned.

Despite the prospect of such shocks, most economists still think the US can skirt a recession, in large part because the labour market has held up much better than expected despite interest rates at their highest level in 22 years.

According to economic forecasts compiled by Bloomberg, US GDP growth will fall from an annualised seasonally adjusted 3 per cent in the third quarter to just 0.5 per cent in the final three months, before bottoming out at 0.1 per cent in early 2024. The unemployment rate is expected to peak at just above 4 per cent.

But economists are worried that the foundations beneath the surprisingly strong US consumer — a source of the economy’s unexpected resilience in recent months — have become more fragile, leaving the economy more vulnerable.

Once bolstered by a hefty stock of excess savings, Americans are estimated to have fully run down those balances this quarter, according to the San Francisco Fed. Delinquencies are rising again for credit cards and auto loans. Small and medium-sized businesses are also feeling the pressure, a new quarterly survey by Morning Consult showed, with many reporting shrinking sales and little expectation for improvement.

Another concern is what all these lurking dangers could mean for US inflation. Price pressures for most goods and services may be down from their earlier peaks, but on the whole they remain well above levels consistent with the Fed’s 2 per cent target.

Blerina Uruçi, chief US economist at T Rowe Price, said she was worried about higher energy prices leading to higher costs elsewhere. The autoworkers strike could also push up vehicle prices, given already-stretched supply.

“Small shocks to the economy can really bring inflation back up again,” she said. “And as a central banker, you’re going to be worried that if you keep getting these upside shocks, what is that going to do to inflation expectations?”

But a lengthy government shutdown would severely impair clarity on inflation and the labour market. The Bureau of Labor Statistics, for example, would cease collecting, processing and publishing data until funding is restored.

That would complicate an already difficult interest rate decision for the Fed at its end-of-October meeting. The central bank, which kept its policy rate at 5.25-5.5 per cent this month, is debating whether its monetary policy is sufficiently restrictive to get inflation firmly under control. But to make that determination, Fed chair Jay Powell has said officials would look at the “totality of the data”.

The central bank already has “imperfect vision, even with both eyes functioning”, said David Wilcox, who led the research and statistics division at the Fed until 2018. Operating without BLS data would be akin to covering up one eye, he added.

“Monetary policy is a fraught exercise prone to mistakes under the best of circumstances, but right now with the economy in a fragile situation, you really don’t want to make a tough job even more difficult.”

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