The US economy faces four "superstorms": Powell's big trouble is coming?

The U.S. economy, which has continued to show resilience this year, may still be able to withstand new storms, but if there are as many as four "super hurricanes" at the same time at some time, can the U.S. economy withstand the shock?

Right now, this thorny issue may already be in front of Fed Chairman Jerome Powell...

While the U.S. economy has experienced some rough waves this year, perhaps none is more uncertain right now. Among the challenges that could be faced this fall are a prolonged U.S. government shutdown, a larger strike by auto workers, the resumption of student loan payments and a sharp rise in oil prices.

While each of these challenges alone may not do much harm, the combination of these factors can be "1+1+1+1 is much greater than 4", especially in the context of high interest rates that are already causing panic in financial markets.

Gregory Daco, chief economist at EY-Bergtron, said all four threats could disrupt economic activity.

Many analysts now expect a rapid slowdown in U.S. economic growth in the fourth quarter of this year, though not an imminent recession. Daco forecasts a sharp slowdown to 0.6 percent in the fourth quarter from 3.5 percent expected in the quarter. Goldman Sachs economists expect economic growth to fall sharply to 1.3% in the fourth quarter from 3.1% in the third quarter.

The threat of a government shutdown is imminent

The most pressing risk facing the U.S. economy today is undoubtedly the shutdown crisis that will be faced in less than a week. September 30 is the last day of fiscal year 2023, and Congress needs to pass a budget appropriations bill covering discretionary spending and federal agency funds for the next fiscal year.

If the budget appropriation bill or the temporary appropriations bill is not passed by this deadline, the U.S. government will face another shutdown. At present, the opinions of congressmen from both parties are still far apart.

If a shutdown occurs, many government functions other than Social Security payments will be suspended, and hundreds of thousands of federal employees will be forced to take unpaid leave. These government employees may spend less during the shutdown, and the government will temporarily reduce purchases of goods and services.

Historically, a similar standoff in December 2018 led to a five-week government shutdown, the longest in U.S. history. About 300,000 federal workers were furloughed at the time. According to the Congressional Budget Office, economic output decreased by 0.1 percentage points in the fourth quarter of 2018 and 0.2 percentage points in the first quarter of 2019.

For Fed Chairman Jerome Powell, a prolonged shutdown of the government may also have a significant impact on Fed decision-making - because it will leave the Fed that relies on economic data for decision-making without data available, superimposed on unstable economic conditions, which will increase the probability of the Fed standing still during the year.

The auto industry strike continues

At a time when the threat of a US government shutdown is imminent, the general strike in the US automotive industry still shows no signs of subsiding, and even intensified.

The United Auto Workers (UAW) strike, which began on September 15, is still "ongoing." On Friday, United Auto Workers President Shawn Fain said the strike would expand to 38 parts distribution centers in 20 U.S. states by General Motors and Stellantis.

While the initial impact of the limited strike is expected to be modest, a wider shutdown could dampen U.S. auto production and push up car prices. Workers at auto parts suppliers can also lose their jobs. According to Goldman Sachs, annualized economic growth decreases by 0.05 to 0.1 percentage points for each week of widespread strikes.

The strike could also delay the auto industry's full recovery from the pandemic-induced supply chain disruptions due to factory shutdowns. For most of last year, dealerships were short on stock of cars as parts shortages dampened production. At a time when many families are looking to buy a car, this has pushed up car prices significantly.

Gabe Ehrlich, an economist at the University of Michigan, said, "While I don't think the strike itself will tip the economy into recession, there are other hurdles." Taken together, the fourth quarter of this year could be a bumpy quarter. ”

Student loans are about to be repaid

Another major risk to the U.S. economy is federal student loan payments, which will resume on October 1.

Starting in October, tens of millions of student loan borrowers will need to pay an average of $200 to $300 a month. This will be the first time borrowers have had to repay their loans since the loan repayment was suspended in March 2020. During this time, they spent money on television, travel, new homes, and thousands of other products. This spending is also one reason why the economy has remained resilient in recent years despite soaring interest rates.

Wells Fargo economist Tim Quinlan estimates that restarting student loan payments could "rip out" about $100 billion from Americans' pockets in the coming year.

With student loans back in return, some of the nation's biggest retailers are now worried about a possible slowdown in consumer spending. Michael Fiddelke, chief financial officer of retail chain Target, said last month that "the imminent resumption of student loan payments will put additional pressure on tens of millions of families already strapped by budgets." Against this backdrop, our plans remain cautious. ”

UBS analysts noted that retailers including Target, Nike and Under Armour could be hit because student loan borrowers make up a higher percentage of customers. The result could lead to an overall decline in retail sales and consumer spending.

The ghost of inflation lingers amid soaring oil prices

Finally, one of the main reasons why the Fed still has to "eat the yellow company" in the face of a series of uncertain downside risks to the economy is the recent surge in oil prices.

Rising gasoline prices are putting the Fed in complete trouble. Brent crude prices have been hovering above $90 a barrel over the past few days, well above just over $70 this summer. According to the US Department of Labor, gasoline prices surged 10.6% month-on-month in August, the biggest one-month increase since June 2022.

This led to consumer inflation rising for the second month in a row after showing a downward trend last year. Prices at U.S. gas stations mostly held steady at high levels this month. According to energy data and analytics provider OPIS, the average price per gallon of regular gasoline on Friday was $3.86.

Rising energy costs, like student loan payments, have cut Americans' budgets for eating out, buying holiday gifts and other discretionary spending. Rising energy costs can also affect the prices of goods and services manufactured, transported, or flown in. Last month, U.S. airfare prices rose nearly 5 percent. Persistent inflation could put pressure on the Fed to maintain higher interest rates for longer periods of time to further slow the economy.

Fed officials are about to "take turns" this week

In fact, the above four major challenges facing the US economy are not even sorted out by the outside world, but summarized by Federal Reserve Chairman Powell himself...

At a press conference after Wednesday's interest rate meeting, Powell was asked what external factors could affect the economy, citing "strikes, government shutdowns, resumption of student loans, rising long-term interest rates, oil price shocks." Powell said at the time, "You're facing an economy that seems to be gaining momentum." That's where we started. But we do face a range of risks. ”

This week, a number of Fed officials, including Powell, will also take turns to appear, which is worthy of investors' close attention. Here is the specific schedule of their speeches (all in Beijing time):

Tuesday 06:00: Minneapolis Fed President Kashkari speaks;

Wednesday 01:30: Fed Governor Bowman gives welcome remarks at an event;

Thursday 21:00: Chicago Fed President Goulsby speaks;

Friday 01:00: Fed Governor Lisa Cook speaks;

Friday 04:00: Fed Chairman Jerome Powell will attend the meeting and answer questions from the live audience and virtual participants;

Friday 07:00: Richmond Fed President Barkin speaks on monetary policy.

Saturday 00:45: New York Fed President Williams participates in a discussion about the economic outlook and monetary policy.

This article is from CaiLian News