"Recession Was Expected..." Wall Street Upgrades US Economic Outlook, But Next Year Remains Uncertain

At the beginning of the year, Wall Street economists who were concerned about an economic downturn have been continuously upgrading their forecasts for the U.S. economy. The upcoming release of the U.S. third-quarter economic growth rate is expected to record an annualized rate in the 4% range, driven by robust consumer spending, reaffirming that the U.S. remains the "engine of the global economy." However, warnings of economic slowdown after the fourth quarter are also emerging, especially from Wall Street heavyweights.

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According to the Wall Street Journal (WSJ) on the 23rd (local time), Goldman Sachs raised its growth forecast for the U.S. third-quarter gross domestic product (GDP) from 3.7% to 4.0% ahead of the announcement on the 26th. Economic consulting firm High Frequency Economics also raised its third-quarter forecast from 4.4% to 4.6%, and its fourth-quarter forecast from 1.0% to 1.2%.

This is due to key economic indicators, including consumer spending, maintaining solid levels despite the cumulative tightening by the Federal Reserve (Fed) and persistently high inflation. In particular, these forecasts represent a significant rebound compared to the U.S. growth rates in the low 2% range during the first and second quarters. Bloomberg's compiled third-quarter GDP forecast was also estimated at 4.3%.

WSJ reported, "The U.S. economy was expected to slow down by now, but the opposite is happening," adding, "While the Fed is debating whether to raise interest rates again, analysts are upgrading their year-end economic outlooks." The outlet diagnosed that despite concerns such as rising loan rates due to rate hikes, the resumption of student loan repayments, the prolonged Ukraine war, and geopolitical risks from the Middle East, the U.S. economy is accelerating. Bloomberg reported on the third-quarter GDP that "unlike stagnant Europe and unstable China, the U.S. will demonstrate that it remains an economic powerhouse."

WSJ also noted that a detailed look at recent indicators confirms signs of some economic acceleration. In September alone, jobs increased by 336,000, a sharp rise from 236,000 in July and 227,000 in August. Such a strong labor market forms the foundation for consumer spending, which drives the real U.S. economy. As inflation eases, wage growth continues, supporting spending. Monthly retail and food services sales increased by only 0.2% in June but rose by 0.6%, 0.8%, and 0.7% respectively in the third quarter.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, estimated that after-tax inflation-adjusted income grew at an annual rate of 7% from December last year to June. Among this, the household savings rate rose from 3.4% in December last year to 5.3% in May this year due to concerns about economic uncertainty but fell back to the 3% range in the third quarter alongside increased spending. Mark Zanni, chief U.S. economist at Barclays, analyzed, "As fears of a recession diminish, people have become more comfortable spending money."

At this point, economists' forecasts for the future economy are broadly divided into three categories. First, considering the lag effects of cumulative tightening, the current economic momentum is not expected to last long. Second, there is a view that the economy may remain hot enough to push inflation back up, which supports the need for further Fed tightening and increases recession risks. The last is the Goldilocks scenario, a so-called soft landing where growth continues while inflation slows.

However, WSJ reported that currently, most economists are not embracing optimistic scenarios like Goldilocks. Ben Herzon, an economist at S&P Global, pointed out, "Has the economy changed enough to ease inflation pressures caused by a tight labor market? I don't think so." The Fed has previously stated that achieving its 2% inflation target requires below-trend low growth and a tight labor market.

Warnings to prepare for economic downturn shocks have also been raised by Wall Street heavyweights. Bill Ackman, chairman of Pershing Square Capital and a giant in the hedge fund world, wrote on social media platform X (formerly Twitter) that "the economy is slowing faster than recent data suggests." He argued that despite economic indicators exceeding expectations, cracks are appearing in the real economy. Bill Gross, known as the "Bond King," also posted on X, pointing to recent collapses of regional banks and rising auto loan delinquencies, predicting a "recession in the fourth quarter."

There is also analysis that the housing market, one of the main pillars of the U.S. economy, is weakening and will drag down next year's growth rate. Goldman Sachs announced in a report released that day that due to the impact of high mortgage rates, housing sales next year will fall to the lowest level in 30 years. According to the report, existing home sales next year are estimated to decline by 6.2% to 3.8 million units compared to this year's forecast. Ronnie Walker, an economist at Goldman Sachs, predicted, "The probability of a U.S. recession is low," but added, "A meaningful impact on U.S. GDP will be confirmed due to declines in home sales and new housing starts."