Analyst Sees GDP Slowing—But Not Sliding into a Recession

By Randy Myers

The U.S. economy is humming for the moment but may be headed for a slowdown. Economic futurist Andrew Busch predicts that the third quarter of this year will prove to have been a peak period of growth, one that will be followed by slower growth through the fourth quarter of 2024. But he counters that the economy isn’t likely to sink into a recession, at least in the near term.

Speaking at the 2023 SVIA Fall Forum in early October, Busch, who previously served as the first chief market intelligence officer for the U.S. Commodity Futures Trading Commission, described a U.S. economy that is struggling under the weight of inflation and rising interest rates and facing numerous external threats. But it also is being supported by government spending, some of which is just coming to market now under the $1.2 trillion Infrastructure Investment and Jobs Act of 2021 and the $280 billion Chips & Science Act of 2022.

Those funds are coming “at the best possible time,” Busch said, arguing that without them “we would definitely be sinking into a much slower growth period, maybe even into a recession by the beginning of 2024. I don’t see that happening, though, because this spending is holding the economy up a little bit better than what we thought it would.”

Meanwhile, negative economic winds are blowing elsewhere. The $14 trillion of government stimulus spending that was designed to combat the economic woes triggered by the COVID-19 pandemic succeeded in fattened consumers’ bank accounts and drove a surge in spending on goods. That is largely behind us, though. Now, consumers are starting to spend more on services, leaving companies in the manufactured goods sector in the lurch. But how long that spending on services will last is uncertain, too, as consumers are now contending with higher levels of inflation and higher interest rates. Some also are having to resume payments on their student loans now that a government moratorium is expiring.

Other negative economic factors cited by Busch include a slowdown in the housing market, rising levels of credit card debt, and declining levels of savings, none of which are good for future consumer spending.

While the pandemic and its aftereffects were difficult to predict, Busch contends that the Federal Reserve contributed to current economic difficulties by moving too slowly and cautiously in battling inflation.

“Back in 2021, when our economy was growing at 5%, a lot of us warned that the government was throwing gasoline on the fire with its additional spending, and that we would get inflation out of it,” Busch said.

When inflation indeed ticked up, he said, the Fed argued that the phenomenon would be transitory. Rather than focus on stopping inflation, it initially sought to drive unemployment as low as possible.

“Fine,” Busch told his SVIA audience. “But inflation is the biggest risk because it’s (nearly) impossible to get out of the economy once it’s there. It creates a negative cycle that feeds upon itself if you’re not careful. And this is what we’re seeing. We have an unemployment rate of 3.8%, a federal funds rate of 5.5%, and the economy is holding in there—and inflation is not going to come off its current levels that significantly.”

While the core consumer price index has retreated from its recent highs lately, Busch noted that it is still, at 4.3%, more than double what the Fed would like to see.

Further threats to the economy include an excessively high supply of debt with the Fed engaged in quantitative tightening and the Treasury issuing high levels of debt. Those factors can help fuel inflation and higher interest rates, which in turn can put additional pressure on an already beleaguered commercial real estate market and banks.

External threats to the economy are numerous, too, Busch said, including the potential behavior of China. If China moved to exert control over Taiwan, as it has suggested it may one day do, and then shut it off from the rest of the world, it could deprive the West of 37% of all logic chips.

Closer to home, Busch said, both leading candidates for president next year would bring some potential threats to the economy. Government regulation is proliferating under the administration of President Joe Biden, Busch said, and Biden has now called for raising the excise tax on stock repurchases to 4% from 1%. A second Biden administration also could result in a 20% tax on unrealized capital gains, Busch said, a repeal of the 2018 tax cuts for upper income earners, and a 25% minimum tax on billionaires.

Meanwhile, former President Donald Trump has said he’ll impose a 10% tariff on all goods coming into the U.S. if he’s elected for a second term in 2024. Busch predicted that in addition to resuming his trade war with China, Trump would likely remove current Fed Chair Jerome Powell.

Busch said a tax on unrealized gains would be “dangerous stuff,” while a 10% tariff on all imports would be “disastrous.”

Ultimately, Busch said, he expects the 2024 election to result in a split government, with neither Republicans nor Democrats gaining simultaneous control of the Senate, the House of Representatives, and the White House. That could limit the damage policymakers do in Washington, but could have negative consequences of its own, too. For example, a divided Washington might fail to address the slated sunsetting in 2025 of the Tax Cuts and Jobs Act of 2017, which lowered taxes for many businesses and individuals.

Despite the hurdles facing the economy, Busch pointed to several opportunities for businesses, including those in the financial services sector. Global warming, he said, offers an opportunity for builders and developers to devise structures that are safer and less susceptible to fire and floods, even if that means, in some cases, not building along coastlines. And current trends in population movement, which show Americans moving from states like California, Illinois, New York, and New Jersey to places like Florida, Texas, Arizona, and the Carolinas, offer an opportunity for businesses to better target their sales efforts in those warmer-climate states.

Finally, Busch said, the advent of generative artificial intelligence tools like ChatGPT offer companies an opportunity to become more productive and insightful in how they run their businesses and connect with customers, including by offering more personalized services in the financial services sector.