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Coface North America economic update: Monetary tightening, easing inflation, and a looming shutdown

Coface North America economic update: Monetary tightening, easing inflation, and a looming shutdown

Analysis by Coface North America Economist Ruben Nizard

As we enter the fourth quarter for 2023, its time to look back on our economic bingo card to see what predictions delivered and what surprises stole our attention. At the start the year, Coface North America Economist Ruben Nizard outlined a trajectory for the region. Among the forecast included easing inflation and a U.S. economy avoiding recession despite mounting challenges.

“At the start of the year, our models indicated the U.S. economy would be resilient and able to combat a potential recession. But just how resilient was yet to be determined,” said Nizard. “As we look over the past three quarters, strong consumer spending outperformed predictions.”

While consumer spending has been a positive headline, Nizard cautions that signs of troubles are brewing. “Dissaving over the past two years to cushion the impact of higher prices combined with the rising cost of borrowing – associated with the unprecedented Fed monetary tightening – are leaving households’ balance sheets in a more fragile position for 2024,” he added. The restart of student-loan payments since the beginning of October could also hit Americans consumption. “As the expiration lines up closely with Black Friday and the critical holiday season for retailers, there is a possibility that it would impact the performance of spending.”

There are many other economic influences with less favorable perceptions. New and intensifying conflicts abroad, coupled with domestic challenges including union labor disputes and government instability, have looming implications in the short and long-term.

This month, the U.S. Congress continues its flair for the dramatics after the ousting of Speaker Kevin McCarthy and narrow avoidance of a federal government shutdown. With the Republican Party struggling to unify around a new Speaker, time is ticking on the temporary funding which expires November 17.

“While a government shutdown is looking increasingly likely, it is important to remember that the impact of most shutdowns on the economy has generally been mild,” said Nizard. “That being said, the timing and duration of the shutdown matters a lot: the potential impact will grow the longer a shutdown persists.” A freeze on nonessential federal activities, volatility on financial markets, and a hit to consumer and business confidence are among the possible consequences.

Another major headline in the economy remains the ongoing labor disputes. While the Writers’ Guild of America was recently able to come to an agreement with studios, their counterparts in the Screen Actors Guild remain on strike.

Of more relevance for the short-term economic outlook, the United Auto Workers also continue their strike against the three largest automakers (Ford, GM, and Stellantis) and now includes 34,000 employees (about 23 percent of UAW members) in 44 facilities nationwide. While the impact of this strike will largely depend on the duration and expansion of shutdowns, it’s already clear that vehicle and parts production, as well as supply chains, will be affected. As auto dealers' inventory remains lean, production disruptions are likely to impact sales in the fourth quarter. Although the hit on overall economic activity remains modest for now, each day the strike continues compounds the potential impacts.

Beyond these headlines, Nizard also continues to monitor bankruptcies within the region. His prediction for sharply increased bankruptcies in both the U.S. and Canada remains.

“U.S. business bankruptcy data and anecdotal evidence show a clear increase in business bankruptcy. Bed Bath & Beyond, Yellow and Rite Aid are some of the most notable filings this year and current trends are consistent with bankruptcies returning to pre-pandemic levels by year-end,” said Nizard. In Canada, insolvencies have already surpassed 2019 levels and remain on a clear upward trend. “Our outlook for financial conditions and economic activity point to a continued increase in bankruptcies and insolvencies in 2024.”  

Stay up-to-date on the latest economic forecasts by following Ruben and Coface on LinkedIn.