Danger, 'pothole' ahead: Economic growth slowing to a near-halt to end the year

Published Sat, Sep 30 20238:50 AM EDTUpdated Thu, Oct 5 20231:58 PM EDT

A U.S. economy that has rolled through most of 2023 is now set to limp into the end of the year as a variety of obstacles finally takes their toll. Be it the United Auto Workers strike , the impending government shutdown or the resumption of deferred student loan payments , ominous barriers to growth have been lining up. Those factors are hardly all that's standing in the way: the bite from higher interest rates, a slowing labor market and soaring energy costs are looming out there as well. The Wall Street consensus is that the economy likely will grow little or not at all in the fourth quarter, with a possibility even that gross domestic product could turn negative for the first time in a year and a half. "The economic headwinds are blowing, and they're blowing harder and harder," said Mark Zandi, chief economist at Moody's Analytics. "Each one of these headwinds by themselves could blow this economy over, but together, they're going to try their darndest to do it. Hopefully, they don't blow any harder than they are right now." Read more in CNBC Pro's Quarterly Investment Guide These underperforming stocks are due for a fourth-quarter comeback, according to Wall Street Oil prices and the dollar surged in the third quarter. These ETFs can help you reset your portfolio After a rough third quarter, here's what to expect from technology stocks into the end of 2023 Bitcoin has limited upside in the fourth quarter as the possibility of higher rates casts a shadow over crypto Supply cuts from Saudi Arabia remain price drivers for oil heading into the fourth quarter Wall Street sees the market's bumpy ride continuing in the 4th quarter. Here are the risks in store Like many others on the Street, Zandi is forecasting a weak fourth quarter, with GDP accelerating at a pace of around 1% annualized, adding that "I can't rule out a negative quarter given these headwinds." On the bright side, forecasters generally agree that the U.S. will avert, albeit narrowly, its second brush with a potential recession in the past two years. But that doesn't mean there won't be some pain, possibly exacerbated if any one of the aggravating factors should prove even worse than expected. 'A fourth-quarter pothole' Most agree that the three main pitfalls — or potholes, in Goldman Sachs terminology — are the UAW strike, the student loan repayments and the government shutdown. Goldman even has quantified the potential risks. "Even as the basic macro view and our core construct on markets haven't shifted, near-term risks and market pricing have and, with that, so has the location of the large asymmetries," Goldman economists Ronnie Walker and Alec Phillips said in a recent client note. "On cue, a fourth-quarter pothole in U.S. growth lies ahead, and that may lead to a more balanced growth picture globally, dimming the shine on U.S. outperformance, providing more confidence in a Fed on hold and reversing some of the recent push higher in U.S. rates," the pair wrote. There's a lot to unpack in that statement, but it essentially refers to the likelihood that the domination of the U.S. in the global growth picture is waning. In turn, that could mean the Fed will be less eager to tighten monetary policy, as weakness in growth could bring down inflation on its own. As for the big-three risk factors, Goldman sees these risks: student loan repayments weighing half a percentage point on Q4 GDP, the government shutdown costing about 0.2 percentage points per week, and the auto strike shaving 0.05 percentage points to 0.1 percentage points per week. Altogether, the firm figures the third quarter will ost a relatively strong 3.1% gain, before that figure tumbles to just 0.7% in the fourth quarter, right around the consensus for a firm that has been one of the more optimistic outfits on Wall Street. In Goldman's view, growth rebounds somewhat in Q1 of 2024 to 1.9% "as these temporary drags abate and income growth reaccelerates on the back of continued solid job growth and rising real wages." GDP saw gains of 2.2% and 2.1% respectively in the first two quarters of the year; the Atlanta Fed's GDPNow rolling data tracker is putting the Q3 gain at 4.9%, though many economists think that's too high. Market impact Worries over growth have weighed on financial markets. The S & P 500 just wrapped up a tough month in September in which the big-cap index dropped about 5% , finishing off a quarterly decline of nearly 4%. The index has been tied closely to surging bond yields and rising oil prices, with geopolitical concerns lurking as well. The good news for markets is that the fourth quarter historically has been a good three months, posting average 5% gains since 1990, according to Sam Stovall, chief investment strategist at CFRA. Moreover, Q4 right before election years has posted average gains of 7.7%, with positive returns 88% of the time. Fortunes in the year's final quarter may largely be tied to Fed policy. The central bank is exp