Signposts on the Road to Recession?
By Michael Englund
The U.S. economic reports slated for release this week will prove important for the financial markets, and the available figures already released reflecting the aftermath of the Sept. 11 terrorist attacks have produced some notably mixed results.
But we at Standard & Poor's believe that the data on hand, both from the post-attack environment as well as the figures already in the books for August, remain consistent with our forecasts of a 0.8% decline in real gross domestic product in the third quarter, and a 1.5% drop in the fourth.
The key to the outlook will be the monthly data for October. And the weekly figures released through the month will provide the markets some critical information for setting assumptions about the near-term direction of the economy.
Perhaps the most important confirmation of a weak set of third-quarter economic data was the August personal income report, which indicated that GDP growth for the quarter may well have approached zero even without the September terrorist attacks. Nominal income stayed surprisingly flat for August, as ongoing weakness in the factory and technology sector depressed employment. This weakness was joined by a significant pull-back in commercial construction during the month. The Oct. 1 release of the August construction spending report showed that commercial construction fell by 3.6% on the month following a hefty 3.2% drop in July.
This surprising slowdown in income and output growth during August restrained growth in consumption spending, though this sector continued to be boosted by tax rebate payments during the month and quarter. We estimate that real consumption spending grew at a 2.3% rate in the third quarter, and probably would have posted 3.5% growth, given the August data, were it not for the terrorist attacks. This strength came despite the slowdown in nominal income growth to a 3% rate during the quarter, and a third-quarter GDP figure that probably would have been flat were it not for the September events, and -0.8% by our estimates otherwise.
Of course, the real question for the economy will be the impact of the September events on consumer and business activity beyond immediate disruptions. To this extent, the September data to be released through October may be too distorted by the "direct" impact of the attacks to be very useful, though these figures will help analysts fine-tune their October forecasts. To this extent, the surprising firmness in two key manufacturing sector indexes -- the National Association of Purchasing Managers and Chicago Purchasing Managers -- has dampened the worst-case scenario, though the jury is still out.
But it is really the employment report for September, to be released Friday, Oct. 5, that will help analysts gauge the likely profile of the September statistics, and the nature of the immediate disruptions. Once this report is available, analysts will be able to place their bets for the October reports that will set the trajectory for the economy as we enter the fourth quarter. The October data to be released in early November will be critical for the markets, and will likely set the tone for debate at the next meeting of Federal Reserve policymakers on Nov. 6.
We at S&P, as well as most market observers, believe it's clear that the economic data over the coming weeks will be sufficiently weak to justify another 50 basis point easing from the Fed at its Oct. 2 policy meeting -- if the Fed is at all predisposed to provide support for the markets. Whether the data will be as supportive for a Fed easing by November is less clear, and this is what the market will need to figure out as the September economic data come into better focus.
Englund is chief market economist for Standard & Poor's