The fourth quarter starts now, and it's not looking good for the economy

Published Sun, Oct 2 20228:00 AM EDTUpdated Sun, Oct 2 20228:55 AM EDT

If the outlook for fourth-quarter economic growth isn't quite like staring into the abyss, it's at least starting to get pretty dark and pretty deep. With a recession seeming to be only a matter of when not if, economists are taking a dim view of what's ahead, even if the last three months could still show some mildly positive growth. Persistent inflation, pressure on corporate earnings and a major slide in the housing market are three big factors pressuring growth and raising fears that the year's end may only be a precursor of the truly scary stuff on the horizon. In fact, Credit Suisse recently titled a note , "The Worst Is Yet to Come." The firm sees the efforts from central banks like the U.S. Federal Reserve to control inflation slowing the global economy to a virtual standstill before trend growth can resume. The U.S., the firm said, will close out 2022 with "close to zero" growth and then just 0.8% gains in GDP for 2022. Other big forecasters also are not optimistic about the growth prospects. Bracing for the fourth quarter Markets plagued by increasing economic uncertainty and geopolitical risk in fourth quarter Wall Street analysts' favorite stocks for the fourth quarter include a casino name that could double No more 'TINA:' The case for putting money into cash, short-term bonds in this volatile market Here's how Wall Street's biggest investors performed during the third quarter's extreme volatility Bank of America said it expects the fourth quarter to post GDP growth of just 0.5% , though that is actually an upward revision from the previous estimate for a decline of 2%. BofA says a recession is coming, though it now expects the downturn to hit in 2023 rather than the previous prediction of late 2022. Goldman Sachs also expects the economy to muddle through the next three months, but on Friday cut its 2023 outlook and is now seeing growth of just 0.9%. Not much to like Asked if he saw anything to be optimistic about on the horizon, economist Joseph LaVorgna said "not really." Like most of his peers, LaVorgna said he expects the Fed's aggressive inflation campaign — five interest rate hikes over a six-month period totaling 3 full percentage points, and almost certainly more on the way — as squelching any reason to believe that the U.S. will avoid a recession, if not by year-end then early in 2023. "We're going to get a hard landing," said LaVorgna, chief economist at SMBC Nikko Securities America and a former senior economist in the Trump administration. "My best guess is it will be a recession and it will not be mild, because you've got significant wealth destruction and you have a Fed that is committed to raising rates more." The economy is coming off a 1.6% GDP decline in the first quarter and a 0.6% drop in the second. That meets the criteria of two consecutive quarters of negative growth that is generally recognized as a recession . The Atlanta Fed's GDP tracker is putting third-quarter growth at 2.4%. The estimate was revised up sharply following personal spending and income data on Friday. Markets are split between whether the Fed will enact a fourth straight 0.75 percentage point rate hike at its November meeting, with another half- or quarter-point increase expected in December. That would elevate rates to their highest levels since late 2007, a time when the central bank was cutting as the worst of the financial crisis had not hit yet. This time around, the Fed is deliberately trying to slow the economy — and specifically a hot labor market that shows no signs of letting up. A historically tight labor market that has two open jobs for every available worker is not only putting a floor under growth but also providing a headache for the inflation-minded central bank. Nonfarm payrolls have risen by 3.5 million through the first eight months of the year and average hourly earnings are up 5.2% on a 12-month basis — a blistering pace by historical standards but still not enough to keep up with an 8.3% inflation rate . Conventional wisdom is that Fed policy operates on a lag that can be anywhere from six months to a year or longer. Given that, the chances of the labor market being able to survive a pace of rate hikes not seen in decades is unlikely. "Q3 is going to be negative [for GDP], Q4 will be more negative," LaVorgna said. "So we will have on paper a recession for 2022, but it won't feel like one until early next year when the labor market softens quite dramatically. It's at that point where I could see a Fed pivot." Just a matter of 'when' Such a "pivot" could mean a number of things, and investors will be watching not only Fed policy actions but also verbal cues for a signal for when policymakers think they've done enough. Chair Jerome Powell's news conferences will be of specific interest during this time. For now, investors are growing increasingly nervous over what the policy moves could portend. Multiple market experts who spoke at CNBC's " Delivering Alpha " conference last week expressed trepidation. "I will be stunned if we don't have a recession in '23," said Stanley Druckenmiller , chair of Duquesne Family Office. "Don't know the timing, but certainly by the end of '23. I will not be surprised if it's not larger than the so-called average garden variety, and I don't rule out — not my forecast — but I don't rule out something really bad." Ken Griffin , who runs the Citadel hedge fund, said of a recession , "there will be one, it's just a question of when and, frankly, how hard." The ramifications will be serious, he said. "We're going to have had millions of Americans unemployed back to back twice in a three-and-change year period," he said. "And from the perspective of our nation, the loss of human capital that that implies is devastating." For investors, Griffin advised making sure they can withstand the fallout from an economic downturn. "You don't want to own so many equities that when the inevitable recession happens, you're forced to sell at the bottom," he said. "That's a much more important concept for investors to understand and to focus on than trying to prognosticate as to when the next recession is going to happen."