January 16, 2023
Our estimated fourth quarter GDP growth rate of 4.5% is far higher than the current street consensus which seems to be centered between 1.5-2.0%. The first official estimate of fourth quarter growth will be released on February 20. That is an unusually wide range with only one month to go. Growth of 1.5-2.0% is a trend-like pace; 4.5% is steamy The outlook for the fourth quarter helps economists fine tune their forecasts for what might happen in 2026. It is also important for us to begin to focus on data for January. For what it is worth, we expect first quarter 2026 growth of 3.2% and growth for the year of 2.8%. Both forecasts are far above the consensus.
The difference for the fourth quarter probably centers on the trade component. The trade deficit for October shrank dramatically. At $29.4 billion it was the narrowest trade gap since June 2009. The question is, what happens in November and December? Our assumption is that the deficit widens somewhat in those two months, but remains narrow. As a result, the trade component should add 1.5-2.0% to fourth quarter GDP growth. We had been expecting 2.8% growth prior to the release of the trade data. If others assume that the October outcome was an aberration and expect the trade deficit to widen sharply in those two months, they will end up with slower GDP growth rate for the quarter. For what it is worth the Atlanta Fed GDPNow forecast calls for fourth quarter GDP growth of 5.3%. We’ll see, but it appears to us that the current consensus forecast of 1.5-2.0% is far too low.
As we begin to look ahead to the first quarter we find that many indicators confirm that growth is being sustained and could even be accelerating.
The Fed has been worried about a potential weakening in the labor market. We do not share that concern. Employment rose 50 thousand in November and December. While not robust, it is somewhat faster than we saw during the summer. The weekly initial unemployment claims data (a measure of layoffs) has declined somewhat in the first three weeks of this year which suggests that the labor market could be gathering some momentum.
Meanwhile, the unemployment rate touched 4.5% in November but quickly retreated to 4.4% in December. Keep in mind the full employment level of the unemployment rate is 4.2% . At that level everybody who wants a job has one. It is close. The labor market may or may not be strengthening, but it certainly is not weakening.
Consumer spending continues to be moderate. We saw a 0.6% increase in retail sales in November. At 3.3% year-over-year growth is slightly slower than it has been for the past year. Despite a record low level of confidence consumers are able to keep spending by tapping into some of their stock market gains.
Investment spending seems to be accelerating. Non-defense capital goods orders have been climbing. The 6.2% increase in the past year is the fastest since late 2022, This is AI in action and it should continue to bolster capital expenditures for the foreseeable future.
The long housing market slump appears to be ending. Mortgage rates have fallen slightly. Home prices are inching their way lower. And consumer income is rising. All three of those factors suggest that housing affordability is on the rise which should bolster both new and existing home sales in the months ahead.
Then there is productivity growth which has surged to 4.0% in the past three quarters. That means nothing until you understand that average growth in the past 10 years has been 1.2%. Something has been happening. Economists are reluctant to quickly alter their forecasts of productivity growth because it tends to be volatile. But this has been going on long enough to conclude that in this case it really is accelerating. And we think we know why – AI. Productivity growth may not continue at a 4.0% pace. We expect it will average 2.5% or so for the next five years driven by the continuing adaptation to an AI world.
There Is still a group that believes the economy cannot continue to grow at a robust pace without more jobs growth, that consumer spending will soon slow because confidence is at a rock bottom level, and that the stock market is grossly overvalued. We do not buy into that view of the world. Sustained faster growth in production caused by the adaptation of artificial intelligence changes everything and sets the economy on a much faster growth path for years to come.
Stephen Slifer
NumberNomics
Charleston, S.C.
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