Société Générale economists Aneta Markowska and Brian Jones are slashing the bank’s forecasts for Q3 and Q4 2013 U.S. GDP growth, citing the effects of the government shutdown that spanned the first two weeks of October.
In a note to clients, Markowska and Jones write:
Hitting a reset button on our economic forecasts
Data available to date suggests that the economy clocked in a 2.3% annualized growth rate in Q3, i.e. marginally lower than our published forecast of 3%. The chart below shows a breakdown of contributions to growth by sector. While nearly every sector of the economy has shown some deceleration vs. Q2, consumer demand is the major reason for our revision, with real consumption now assumed to have grown at just 1.5% (tomorrow’s retail sales will be the next key data input into this estimate). We are also revising down our Q4 forecast from 3.6% to 3.0% to account for the effects of the government shutdown and for the slightly weaker momentum coming out of Q3.
We remain fundamentally bullish on the US growth. Since the start of the year, we have been calling for an inflection point around mid-year as the last of the headwinds began to dissipate. While the government shutdown has prolonged the period of fiscal uncertainty, the reality remains that new austerity — above and beyond what was legislated at the start of this year — is quite unlikely. Policy uncertainty is also on a downtrend, notwithstanding recent spike. And, housing should continue to be supported by declining real mortgage rates.
Earlier this month, Bank of America became the first major bank to slash its U.S. GDP growth forecasts for Q3, Q4, and even Q1 2014, citing the effects of the government shutdown and the debt ceiling debate that gripped markets over the first half of October.
In a note to clients, BAML economist Ethan Harris wrote:
As we have noted before, the shutdown has made the economic and Fed outlook much more uncertain. Prior to the shutdown, the economy seemed to be still stuck at 2% growth, but with hope of stronger growth ahead. The shutdown caused both an austerity shock — cuts in government spending — and an uncertainty shock. The shutdown has hurt sentiment a lot, pushing many survey measures lower.
Looking ahead, the issue now is does sentiment quickly go back to pre-crisis levels or does it linger lower? The latter is likely if people worry about a sequence of shutdowns. Hence we need to wait for post-crisis survey data to get a clear sense of the lasting damage. Given release lags, it will take even longer to judge the impact on hard data.
The results of the first post-shutdown surveys were not pleasant. Markit’s flash U.S. manufacturing Purchasing Managers Index survey revealed the first monthly contraction in manufacturing output in October since September 2009. The University of Michigan’s consumer confidence survey revealed a sharp drop in sentiment over the course of October.
Though Wall Street largely expects the U.S. economy to finally accelerate in 2014, a new “shadow consensus” of slow growth and continued monetary easing is beginning to emerge.
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