The economy probably only grew 1.5% in Q3 amid consumer weakness, CNBC tracker shows

Key Points
  • The economy likely is growing at just a 1.5% pace in the third quarter, according to the Rapid Update tracker run by CNBC and Moody's Analytics.
  • Participating economists lowered their projections following weak retail sales and inventory data Wednesday.
  • The tracker is below other Federal Reserve indicators of growth.

The economic outlook is getting more dour for the third quarter, with growth now forecast at just 1.5%, according to a projection by CNBC and Moody's Analytics.

Weak consumer spending and inventory data caused economists responding to the Rapid Update tracker to lower their collective GDP projections by one-tenth of a percentage point to the lowest level yet for Q3.

Retail sales fell by 0.3% in September, the first drop since February and a sign that the resilience of the consumer could be waning. At the same time, business inventories were flat for August, missing Wall Street expectations for 0.3% growth.

The disappointing data caused Goldman Sachs to cut its tracking estimate by 0.3 percentage point to 1.7%. HFE represented the top of the estimates at 2%, while Oxford Economics was at the other extreme with a 1.2% forecast.

The CNBC/Moody's tracker is somewhat more pessimistic than other gauges.

For instance, the Atlanta Fed's GDP Now measure puts growth at 1.8%, actually up one-tenth of a point following Wednesday's sales and inventory data. The New York Fed's Nowcast is at 2% but hasn't been updated since Oct. 11.

If the Rapid Update projection holds and is correct, it will mark only the second time since Q2 of 2016 that GDP fell below 2%.

Recession watch continues

The projections come during an unusually high level of uncertainty, with many economists warning of a potential recession on the horizon as weak global growth bleeds into the U.S. and the ongoing U.S.-China tariff battle saps confidence and business investment.

According to the New York Fed, chances of a recession over the next 12 months are at nearly 35%, near the highest level since April 2008 as the U.S. was in the midst of the financial crisis. The indicator looks solely at the relationship between the 3-month and 10-year Treasury yields; when the former rises above the latter, it has been a reliable recession predictor over the past 50 years.

Other measures, though, are not as dire.

Oil prices, historically another key yardstick for recession probabilities, have stayed in check. No recession going back to the early 1980s has started without a price jump of at least 90%.

Another recession measure called the Sahm indicator also sees basically a zero chance of a recession. The measure looks at the three-month moves of the unemployment rate and says a 0.5 percentage point rise over that time is a warning sign. Unemployment is currently at a 50-year low.

"Getting the yield curve to un-invert, either with higher long-term rates or lower short-term ones, would make it 3 for 3 in the plus camp. That's the wall of worry this market has to climb just now," Nick Colas, co-founder of DataTrek Research, said in a note.

One other point of optimism is that the retail sales data may not be as bad as it looked.

Previous months' spending was revised higher, and the year-over-year consumption rate is still holding at 2.8%. Low unemployment and household debt coupled with a high savings rate bode well for future consumer behavior, said Joseph LaVorgna, chief economist for the Americas at Natixis.

"Retail sales showed broad-based weakness last month, which will no doubt embolden market participants that are expecting much slower growth ahead," LaVorgna said in a note. "However, we view this as a misinterpretation of the data, as the underlying trend in consumption remains on a resilient course aided by solid household fundamentals."

Keeping the economy on course is key for President Donald Trump.

A study released earlier this week by Moody's Analytics showed that if current conditions hold up, Trump should win reelection easily. In a tweet Wednesday morning, Trump predicted the economy would "crash" if a Democrat takes the Oval Office in the 2020 election.

Federal Reserve policymakers also are watching closely.

Chicago Fed President Charles Evans said Wednesday that he agrees with the consensus among policymakers that no further rate cuts likely are needed this year or in 2020, also so long as present conditions persist.