The Federal Reserve, as expected, paused its rate hikes overnight. Fed Chairman Jerome Powell noted that while the U.S. economy is stronger than anticipated, achieving a soft landing is the Fed's primary goal, though not its baseline expectation.

On September 21, media analysis highlighted that when a major auto workers' strike, a government shutdown, and the resumption of student loan repayments converge, it could potentially "derail" the prospects of a soft landing for the U.S. economy. GDP growth is expected to slow significantly in the third and fourth quarters.

A team led by Goldman Sachs Chief Economist Jan Hatzius reported that due to these three events, U.S. GDP growth will "significantly slow" in the third and fourth quarters, with projections dropping from 3.1% in Q3 to 1.3% in Q4. Factors contributing to this include:

  • The resumption of student loan payments, which could reduce quarterly annualized GDP growth by at least 0.5%.
  • A federal government shutdown, which would decrease the quarterly annualized growth rate by about 0.2% for each week it persists.
  • The ongoing strike by the United Auto Workers (UAW) leading to reduced car production, which would decrease the quarterly annualized growth rate by 0.05%-0.10% for each week it continues.

Impact of a U.S. Government Shutdown

The current fiscal year will end on September 30. If all 12 appropriation bills or a temporary funding agreement aren't passed by then, the U.S. government will face a shutdown. Bank of America estimates a 50% probability of this happening, while Goldman Sachs sees it as almost a certainty.

A government shutdown would undoubtedly impact the U.S. economy and markets. Goldman Sachs suggests that a full government shutdown would directly decrease economic growth by about 0.15 percentage points for each week it lasts. However, its impact on financial markets would be limited and not as concerning as a U.S. government debt default.

Both Bank of America and JPMorgan Chase note that the economic growth impact of a government shutdown is moderate, about 0.1 percentage points of GDP growth rate per week, with secondary effects from reduced government spending on goods and services.

U.S. Auto Industry Strike Continues

On Wednesday, September 20, nearly 13,000 workers from General Motors, Ford, and Stellantis went on strike at plants in Wentzville, Toledo, and Wayne. UAW Chairman Shawn Fain stated that more strikes would be announced on Friday unless "significant progress" is made in negotiations.

Data from S&P Global Mobility indicates that by Friday, the UAW strike will have lasted a week, resulting in a daily production loss of about 3,200 vehicles.

According to RSM Chief Economist Joe Brusuelas, if the strike continues to expand, affecting the 150,000 UAW members, nearly a third of U.S. car production could be shut down, costing the U.S. economy about $500 million daily. Considering the ripple effects throughout the economy, the strike could drag down GDP by 0.7 percentage points as long as it persists.

Oxford Economics suggests that if this scenario unfolds, wage growth could temporarily turn negative. The resulting shortage of cars at dealerships might push up new car prices, which, according to CPI data, have been declining since April.

Michael Pearce, Chief U.S. Analyst at Oxford Economics, mentioned that the auto supply chain is still grappling with pandemic-related disruptions. As industry profits hit record highs, workers are trying to recoup wage purchasing power lost to inflation, anticipating intense negotiations.

Debate Over Soft Landing Intensifies

Hatzius believes that even if all three events occur simultaneously, dragging down Q3 and Q4 GDP growth, the U.S. economy can still avoid a recession this year.

Gregory Daco, Chief Economist at EY-Parthenon, estimates that these three events will drag down GDP by 0.8 percentage points in Q3 and Q4. Considering the already pressured service and business investment expenditures, growth might approach zero.

A team led by Citibank Economist Nathan Sheets studied economic cycles since 1965 and found that to alleviate high inflation and a tight labor market, a significant rise in unemployment is needed, inevitably leading to an economic recession.

Powell believes that economic growth isn't the Fed's mission. The question is whether economic growth truly threatens the ability to achieve 2% inflation. However, he acknowledged that surveys show public dissatisfaction with the U.S. economy. He also recognized that when the Fed raises rates, those living on borrowed money feel it more acutely.

He sees the strikes, government shutdown, resumption of student loan repayments, and rising long-term interest rates as risks. Powell stated that while government shutdowns typically have a limited macroeconomic impact, the Fed might have to deal with delayed data due to a shutdown, which could pose challenges.