Thursday’s GDP report expected to show the U.S. economy at a crossroads

Economic growth likely slowed to its weakest pace in a year and a half to end 2023, possibly setting the stage for a more pronounced slowdown ahead, according to Wall Street economists.

The consensus outlook for the fourth quarter is that gross domestic product grew at a 2% seasonally adjusted annualized pace, slicing downward from the 4.9% in Q3 and the lowest reading since the 0.6% decline in the second quarter of 2022.

As the Commerce Department’s report hits Thursday morning, Wall Street’s attention almost immediately will turn to what the signs are for growth going into 2024.

The report likely will “represent a sharp deceleration” from the previous period, Bank of America economist Shruti Mishra said in a client note. “Incoming data continue to point to a resilient, but cooling, U.S. economy, led by consumer spending on the back of a tight labor market, higher than expected holiday spending, and moderately strong balance sheets.”

BofA has a below-consensus view that GDP — the sum of all goods and services produced during the period— will slow to a 1.5% pace, largely because parts of the economy not directly related to consumer spending, such as nonresidential business fixed investment and housing, will tail off.

In addition, the bank expects a slowdown in inventory restocking to shave close to a full percentage point off the headline number.

Looking forward, Bank of America forecasts the first quarter of 2024 to show growth of just 1%.

“Consumer spending is likely to slow from its current pace due to lagged effects from tighter financial conditions, higher energy prices, and cooling labor market,” Mishra said.

Elsewhere on Wall Street, expectations are mixed.

Goldman Sachs earlier this week lifted its Q4 estimate to 2.1%, an increase of 0.3 percentage point, taking its full-year GDP outlook to 2.8%. One significant factor Goldman sees is stronger than expected state and local government spending, which boosted Q3 growth by nearly a full percentage point and is predicted to show a 4.5% increase in the final three months of the year.

The bank’s economists also see growth holding up fairly well in 2024, ending the year at 2.1%.

Two other key elements will take the focus as investors digest the GDP report: the state of consumer spending, which accounted for about two-thirds of all activity in Q3, and inflation, specifically how the Federal Reserve might react to personal consumption prices that come out of Thursday’s report as well as a separate Commerce Department release Friday.

“We do expect the economy to slow … further in 2024 as the impact of monetary tightening continues to weigh on economic activities,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “However, we do not expect the economy to hit a recession.”

RSM expects the GDP report to show a 2.4% gain on solid growth in consumer spending, though some economists say December’s larger than expected retail sales increase was fueled by seasonal distortions in the data that will be corrected in January.

Citigroup agrees with the consensus call of 2% growth in Q4 but sees tougher times ahead, mainly because of the lagged impact the Fed’s previous will rate cuts will exert, as well as inflation that could turn out to be more durable than anticipated.

“Data released [Thursday] may in retrospect turn out to document the one quarter of true ‘Goldilocks’ conditions,” Citi economist Andrew Hollenhorst wrote. “But we do not share the market and Fed’s sanguine assessment of the macroeconomy over the remainder of the year.”