Is the Economy Inching Toward a Recession? Kiplinger Letter

We may not be in a recession, but the economy still faces several threats in the coming months, which together figure to act as a drag on growth. How much of a slowdown we get depends largely on how these looming issues play out. To help you understand what is going on with the U.S. economy and what we expect to happen in the future, our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest…

First up — the autoworkers strike at the Detroit Big Three: General Motors, Ford and Stellantis. The UAW has struck three production
plants (one from each company) and 38 parts distribution centers for GM and Stellantis so far, and the two sides remain divided on a new wage deal, with the carmakers’ latest offer not enough for the United Auto Workers’ leader. But we know that consumers will suffer when factories go dark. Vehicle inventories were just recovering this year after COVID-era shortages.

The strike at all three firms will seriously crimp auto supplies if it continues. If that happens, look for new car prices to shoot up by 5% or so, and used-car prices to rise even faster, by about 10%. Owners may not be able to service their vehicles at dealers once parts shortages occur.

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In the event that a strike lasts for 40 days — as happened at GM in 2019 when workers went out — GDP growth would suffer a bit, about 0.3%. A longer strike may actually cause a recession. If the two sides do reach a last-minute deal it’ll take some hefty pay increases for workers. The economy would dodge a bullet, but already-high car prices would rise even more.

Then, there’s the threat of a government shutdown starting October 1. Congress is nowhere near passing spending bills to fund federal agencies in the new fiscal year. Some House Republicans want sizable spending cuts and say they’ll force a shutdown if they don’t get them. Senate Democrats are saying “No way.” How this gets resolved isn’t clear as of now. Lawmakers might kick the can and OK a temporary funding bill. But that might merely defer an eventual shutdown and a resulting hit to GDP growth.

Following a possible shutdown is the resumption of student loan repayments, which is slated for October. Not every borrower is likely to start repaying, given the order the White House issued that nonpayment can’t be reported to credit rating bureaus. And some borrowers will use income-based plans that limit how much they must pay each month.

Still, the net result will be more people devoting some of their income to debt service after a long hiatus, which means less discretionary spending money. The most serious risk to growth is also a pretty good bet to come to pass: A pullback in consumer spending. Folks are using up pandemic-era savings that built up when the economy was partially shut down and there were fewer things to spend money on, such as travel and dining. Consumers aren’t tapped out just yet. But the average savings rate is down to 3.5%, from a pre-COVID range of 7%-9%.

Low-income borrowers are falling behind on debt payments. Higher-income households are likely to tighten up as their own savings dwindle. Retailers will have to cope with weaker demand.

All this points to a slower economy as 2024 gets underway.

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David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.