The markets are gearing up for key data that has the potential to increase market volatility ahead of the contested presidential race on November 5 and the Federal Reserve's monetary policy meeting just two days later. This week, the preliminary estimate of U.S. third-quarter growth, September figures for the Fed's preferred inflation gauge—the Personal Consumption Expenditures (PCE) Price Index—and October payroll numbers will be closely monitored.

The current state of the U.S. economy suggests that the Fed may have succeeded in controlling inflation without triggering a recession. Labor market conditions remain generally healthy, while consumer spending shows resilience, bolstering growth expectations. Meanwhile, core prices in September reflected a modest increase in inflation, yet overall inflation continues on a downward trend.

Following recent data suggesting a solid footing for the U.S. economy, recession fears have evaporated. While the labor market hasn’t deteriorated as feared, the data confirms a slower absorption of labor supply. This dynamic keeps expectations for gradual Fed rate cuts alive, as further cooling in the labor market is not desired. However, concerns are mounting that inflation progress could stall after the elections, supporting bets on a slower pace of rate cuts.

In this context, while this week’s data is not expected to influence next week’s Fed decision, it is clear that these figures will serve as important catalysts in shaping expectations for the Fed's future policy path.

Atlanta Fed GDPNow Model Signals Strong Q3 Growth at 3.3%

Despite recession concerns casting a shadow over the third quarter, recent data has strengthened confidence in the economy's strong performance. While GDP growth slowed to 1.6% in the first quarter of this year, it rebounded robustly to 3.0% in the second quarter. Furthermore, Wednesday’s data is expected to show that the economy continued to grow at a solid pace in the third quarter.

Economists surveyed by Bloomberg have a median forecast of 3% growth for the third quarter. In comparison, the Atlanta Fed’s GDPNow model estimates growth at 3.3%. This estimate was revised down from 3.4% to 3.3% due to a decline in private domestic investment growth; however, the overall outlook shows that the U.S. economy is performing strongly.

Private Sector Caution Pressures U.S. Growth Amid Election and Policy Uncertainty

Consumer spending remains the main driver of U.S. economic growth, while the contribution from private investment spending is declining. According to the Richmond Fed’s CFO Survey, two key factors are leading businesses to cut spending: monetary policy and uncertainty related to the presidential election.

The survey shows that monetary policy remains the top concern for businesses for the fifth consecutive quarter, with approximately 40% indicating that current interest rates are causing them to cut back on both capital and non-capital expenditures. Besides, about 30% report that, due to election uncertainty, they have 'postponed,' 'reduced,' 'indefinitely suspended,' or 'completely canceled' investment plans.

The Fed’s more recent Beige Book survey reports that economic activity has remained flat in most U.S. states since early September. Furthermore, the survey includes around 15 references to the presidential election as a source of uncertainty, indicating that both consumers and businesses are delaying investment, hiring, and purchasing decisions.

In conclusion, the growing caution within the private sector is weighing on the U.S. economy. Thus, upcoming growth figures will reflect this pressure. Given the pressure that high interest rates place on business activity, Fed rate cuts are expected to support economic growth as they continue. However, the impact of election results on sentiment will be critical. Depending on post-election market reactions, debates around the U.S. economy’s growth performance and the Fed’s future policy path are likely to intensify.