Slowing economy presenting more challenges: NABE
3Q GDP jumped 4.9% but is expected to retreat to 1.5% in 4Q
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The nation's leading economists stopped short of forecasting a full-blown recession, but they do see headwinds for the U.S. economy.
Slowing Sales, Weaker Profit Margins
"The October 2023 Business Conditions Survey results suggest a more challenging business environment as the economy slows," said National Association of Business Economists (NABE) president Ellen Zentner, chief U.S. economist, Morgan Stanley. "Sales are seen as growing but at a slower pace, and profit margins are reported to be declining" according to the survey released Monday.
"The October 2023 Business Conditions Survey results suggest a more challenging business environment as the economy slows. Sales are seen as growing, but at a slower pace, and profit margins are reported to be declining."
More participants in the survey, which reflects third-quarter and near-term views, report falling sales, while fewer report rising sales over the past three months vs. the July survey. Slowing sales, combined with declining profit margins, can be a headwind for companies with the group's NRI index for profit margins falling to the second-lowest reading since the pandemic.
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For example, Tesla, in its latest quarterly results, reported similarly. EDBITA margins fell to 16.1% vs. 23.2% during the same period a year ago, surprising Wall Street.
"In a nutshell, we would characterize last night's conference call as a "mini disaster" as the Street wanted to get their arms around the falling margins and constant price cuts seen globally, but instead we heard from a much more cautious Musk, which focused on higher interest rates, wrote Dan Ives, analyst at Wedbush Securities, following the automakers earnings call.
Elon Musk, chief executive officer of SpaceX and Tesla and owner of Twitter, gestures as he attends the Viva Technology conference dedicated to innovation and startups at the Porte de Versailles exhibition centre in Paris, France, June 16, 2023. (REUTERS/Gonzalo Fuentes/File Photo / Reuters Photos)
ELON MUSK WORRIED ABOUT INTEREST RATES
Rising Interest Rates = Headwinds
CEO Elon Musk's warning over higher interest rates was clear.
"As interest rates rise, the affordability of anything bought with that decreases, so effectively increasing the price of the car. So, when interest rates rise dramatically, we actually have to reduce the price of the car because the -- the interest payments increase the price of the car. So -- and this is at least -- at least up until recently was to believe the sharpest interest rate rise in history," Musk warned during the earnings call.
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The Federal Reserve is expected to leave rates unchanged at Wednesday's meeting while leaving the door open for another increase in December.
NABE participants, 55%, also cited higher interest rates as one of the biggest downside risks to their businesses, while 51% named cost pressures.
While the U.S. economy grew by a whopping 4.9% during the 3Q, many say that it is unsustainable as the lion's share of the growth came from summer concert-goers and record air travel. Estimates for 4Q are seen dropping to around 1.5%.
TAYLOR SWIFT, BEYONCE JUICE 3Q GDP
Still, while cautious in their outlook, NABE participants believe the U.S. will be able to side-step a recession with the majority (79%) forecasting a "probability of 50% or less" of a downturn, up from 71% in the July survey.
NABE members work for private-sector firms or industry trade associations, including Coca-Cola, Ford and the National Beer Wholesalers Association, to name a few.