No recession yet...but cracks emerge in economy
The blockbuster GDP numbers for the third quarter show that the US consumer is still spending. But there are warning signs. UPS cut its outlook. The shipping giant cited weaker global demand.
The US economy roared ahead in the third quarter, chugging along a 4.9% annualized clip. That was higher than expected, and consumer spending was strong. It may be tempting to declare that America is going to avoid a material slowdown, or even a recession, especially since the labor market remains healthy for now. But that might be a mistake.
Yes, consumers continue to shop…despite inflation. And the Federal Reserve is likely to not raise interest rates at its meeting next week. Heck, the Fed could be done with its rate hiking campaign for now. An increase isn’t expected in December either.
But the cumulative impact of the previous rate hikes, combined with inflation that, while moderating, is still above historical norms, could hurt consumer demand and corporate profits this holiday season and in 2024. In other words, the soft landing talk might be a little overdone.
Look at UPS earnings this morning for example. The shipping giant cut its sales outlook for the full year Thursday morning. CEO Carol Tomé said in the earnings release that “unfavorable macro-economic conditions negatively impacted global demand in the quarter.” UPS stock fell about 4% on the news and rival FedEx was lower along with it.
Facebook and Instagram owner Meta Platforms also sounded a bit pessimistic about the next few months, despite reporting solid user growth for the third quarter and earnings and revenue that topped forecasts after the closing bell Wednesday. Meta warned about its Q4 advertising outlook, sending the stock down 5% in early trading Thursday. The company said advertisers have grown skittish since the start of the Israel-Hamas war.
Meta CFO Susan Li said during a conference call with analysts late Wednesday that “we have observed softer ad spend in the beginning of the fourth quarter, correlating with the start of the conflict.” She added that Meta’s updated guidance “reflects the greater uncertainty and volatility in the landscape ahead.”
In other words, there are a lot of risks right now that may lead to, at the very least, decelerating growth in the economy. Energy prices could remain elevated due to the wars in the Middle East and Russia-Ukraine. Businesses are growing cautious. Mastercard, which also reported strong Q3 results Thursday, fell 4% nonetheless. CEO Michael Miebach acknowledged in the earnings release that “macroeconomic and geopolitical uncertainty remains elevated.”
Sure, a calamitous 2008 style recession still doesn’t seem likely. The job market is still holding up. Only 210,000 people filed for unemployment benefits last week, numbers that are still historically low. But investors shouldn’t ignore some of the cautious comments from Corporate America. They seem to realize that the economy is on fragile footing.