On Thursday, the government will issue its advance estimate of the nation’s economic output for the fourth quarter of 2022.
The report on gross domestic product will likely show the economy grew at an annual pace somewhere around 2.6% or so, down from the 3.2% in the third quarter. The Federal Reserve’s campaign to arrest inflation by raising interest rates is working and the consequences of the higher borrowing costs are a slowing economy that will be reflected in the GDP data.
But for those looking for more evidence of a slowdown and even the possibility of a recession in the second half of this year, this week’s early read on corporate earnings is already providing some insight. Add to that recent layoff announcements from big-name companies like Google, Amazon and Microsoft, and the picture becomes even more clear.
“Thursday’s GDP report is expected to show a slower pace of economic growth for the fourth quarter of 2022, and slowing economic growth will be a big theme for 2023, which will put pressure on corporate earnings,” said Richard Saperstein, chief investment officer at Treasury Partners. “The 10-year Treasury yield has declined by 70 (basis points) from its peak and the yield curve remains firmly inverted, signaling a weaker economic outlook in the second half of 2023.”
Political Cartoons on the Economy
The key question is how much weaker – and that remains a matter of debate. Does the economy achieve the proverbial “soft landing” where the Fed’s tightening of monetary policy slows the pace of inflation without tipping the economy into recession, or is a downturn inevitable?
Early Wednesday, the markets seemed to be betting on the latter after a few days in which investors took reports of slowing inflation as a sign the Fed could be close to an end of its tightening cycle. The Dow Jones Industrial Average fell around 300 points a day after Microsoft reported quarterly earnings that beat estimates. But it was Microsoft’s guidance for the remainder of 2023 that dampened spirits on Wall Street.
“In our commercial business we expect business trends that we saw at the end of December to continue into Q3,” Amy Hood, Microsoft’s chief financial officer, said during the conference call with investors and the media.
Last week, Microsoft announced it would cut 10,000 workers from its global workforce of more than 220,000 employees. Amazon has announced layoffs of 10,000 workers while Facebook parent Meta is also planning to cut 11,000 employees.
Overall layoffs still remain very low and the unemployment rate fell to 3.5% in December while remaining in the 3.5% to 3.7% range for nearly a year. Some economists believe the economy could see a mild recession with minimal effect on employment levels.
Microsoft CEO Satya Nadella said in a note to employees that the company saw significant growth during the coronavirus pandemic, but now that has slowed.
“We’re living through times of significant change, and as I meet with customers and partners, a few things are clear,” he wrote. “First, as we saw customers accelerate their digital spend during the pandemic, we’re now seeing them optimize their digital spend to do more with less.”
That is a theme across the economy as companies adjust from the supercharged economic environment of 2021 and 2022, fueled by massive fiscal stimulus from Congress and low interest rates from the Fed, to a more normal pace of growth. The real estate industry, for example, has seen home sales fall by more than a third in the past year as mortgage rates have doubled from below 3% to around 6% now.
The rollercoaster nature of the recovery from COVID-19 can be seen in the earnings of Boeing. The aerospace giant was adversely affected by the sharp drop in air travel during the pandemic but is now scrambling to adjust production levels to meet what has been a sharp rebound in demand. As the economy came back to life, the labor market has remained tight and while supply chains have improved, there are still shortages of key materials.
Although Boeing saw a 7% increase in revenues last year, it still posted a $5 billion loss, citing labor costs and supply issues.
The latest news from corporate America comes as the Fed is set to meet next week to consider its first moves on interest rates for 2023. The consensus is that the central bank will raise rates by a quarter point, less than its December hike of 50 basis points and well below the 75 basis point increases it approved in 2022.
But there is a tug of war ongoing between the markets and the Fed, with the latter insisting it will continue raising rates or holding them steady for much of 2023. But the bond market is pricing in a pause, or a cut, in interest rates sometime later this year.
Meanwhile, various economic reports are showing a slowdown in key areas from housing to retail. On Monday, the Conference Board’s leading economic index showed a sharp drop of 1% in December, following a 1.1% decline in November. The index has been a reliable indicator of recessions in the past.
“There are many signs that the economy is quite likely to be heading into a recession,” Dan North, senior economist at credit insurer Allianz Trade North America, said on Thursday. “We are seeing falling retail sales, shrinking real disposable personal income, slowing real consumption expenditures, consumers worrying more about the future than the present, slowing in the labor market, a collapsing housing market, weak ISM reports, and of course, the inverted yield curve. It’s a gruesome list. And those shots fired at inflation are headed directly at the economy too. Maybe the Fed should take a breather?”
That’s unlikely at least next week. But the clamor for a pause will only grow if the earnings picture weakens or other signs of an economic slowdown grow more numerous.
This article was originally published by usnews.