The Economy Appears to Be Heating Up. So Are the Headwinds

Pressures appear to be building for the US economy, but the warning signs look less severe when viewed through third‑quarter GDP estimates. The debate now turns on whether the current acceleration in economic activity signals continued resilience into Q4 and 2027, or instead marks a near‑term peak before several strengthening risk factors begin to take a toll. Let’s start with the good news. Today’s Q3 GDP nowcast tracks at a 2.4% annualized increase, based on the median of multiple estimates compiled by The Capital Spectator. If correct, economic activity will accelerate from Q2’s modest 1.5% increase. The government’s official data for the current quarter is scheduled for release on Oct. 29. Today’s median nowcast ticked up from our previous 2.3% estimate on Aug. 24. Three of the component inputs are above the median, led by the Atlanta Fed’s GDPNow model, which is nowcasting a sizzling 4.7% increase (as of Sep. 3). That looks high relative to the median, but the common ground is that all the nowcasts anticipate a robust pickup in economic activity relative to Q2. Last week’s update of PMI survey data aligns with the upbeat Q3 estimate. “Business activity growth across the private sector accelerated in August, marking a clear shift in gear for the US economy,” said Usamah Bhatti, Economist at S&P Global Market Intelligence. The Dallas Fed’s Weekly Economic Index (WEI) has also rebounded and is currently projecting that year-over-year GDP growth is 3.1% (through Sep. 3), marking a strong improvement over the 2.1% rise in Q2. The latest hard data for the labor market is also signaling stronger growth. Non‑farm payrolls rose 162,000 last month — far above the 55,000 consensus forecast and the strongest monthly increase since March. The rebound is less dramatic for the private sector, but hiring momentum among companies remains solid. The question is whether gathering clouds on the macro horizon will bring challenges in the months ahead. The combination of various risk factors will surely test the economy. The short list of worrisome stress catalysts: - Rising US Treasury yields - Ongoing inflation anxiety - Continuing hostilities with Iran - Elevated energy prices - Increasing trade‑war risk, including renewed tensions with Canada - AI fatigue as Wall Street shifts from the growth narrative to the mounting capital costs of the buildout - Growing US fiscal vulnerability as widening deficits, rising interest costs, and a deteriorating debt profile threaten to become a macro drag Any one or two of these risks would be concerning but arguably manageable. The combination, however, could create headwinds strong enough to slow or reverse the economic momentum that appears to be unfolding in Q3. To be fair, some hazards could fade. A durable peace deal with Iran, for example, would ease pressure on energy prices and inflation. Meanwhile, the bond market could rally if Congress and the White House begin to address the deteriorating fiscal profile. On the AI front, optimists may be right that the technology will deliver productivity gains that support Treasury Secretary Bessent’s view that “we can grow our way out of that,” offered in response to news that the US national debt has topped $40 trillion for the first time. For the moment, the Q3 GDP nowcasts offer a degree of support for Bessent’s rosy outlook. Whether his upbeat view reflects a reasonable scenario or mere wishcasting remains an open question — one that the incoming data will increasingly clarify as the year winds down. Is Recession Risk Rising? Monitor the outlook with a subscription to: The US Business Cycle Risk Report