The US economy remains on track to post a strong increase in output for the third quarter, but the current estimate reflects an ongoing deceleration from previous nowcasts.

Today’s revision indicates that output will rise 4.7% in the July-through-September quarter, based on the  median nowcast of several estimates compiled by CapitalSpectator.com. That’s a solid gain, but it’s moderately below the previous 5.1% estimate (published on Aug. 31) and recent updates suggest a downside bias will continue to trim estimates in the weeks ahead.

The current nowcast for Q3 is also well below the second-quarter’s 6.6% increase. Although real-time nowcasts are only rough approximations, at best, of current/recent economic activity and should be viewed cautiously, the main takeaway for today’s update is that government’s Q3 GDP report scheduled for release late month will show a substantially slower pace of growth vs. the previous quarter.

PMI survey data also anticipate a downshift in Q3 growth. The US Composite PMI Output Index, a GDP proxy, slipped to 54.5 in September, reflecting an ongoing downshift vs. previous months. Although the current reading is still comfortably above the neutral 50 mark that separates growth from contraction, the 54.5 print marks the lowest level in a year.

“The slowdown was led by a cooling of demand in the service sector, linked in part to the Delta variant spread,” says Chris Williamson, chief business economist at IHS Markit, which publishes the PMI numbers. “However, while manufacturers have seen far more resilient demand, factories face growing problems in sourcing enough supplies and labor to meet orders.”

Although current data continue to show a strong gain for Q3 GDP, the remaining days of the quarter may bring further downgrades, in part due to rising risks linked to a possible government shutdown and default on US Treasuries if Congress doesn’t raise the debt ceiling. In that scenario, at some point in October the US Treasury will run out of funds to pay the country’s obligations.

The White House is reportedly preparing for these events. It’s unclear if either of these outcome is likely – political gamesmanship is at play and complicates evaluations of risk probabilities. The stakes, however, are high for the US economy. Indeed, Treasury Secretary Janet Yellen warns that if Congress doesn’t raise the debt ceiling and the non-action triggers a default in US Treasuries, the result could be “catastrophic” for the economy.

A number of analysts predict that a default will be averted, although the solution could come at the last moment. October, in other words, could be a rough month. Even if the country avoids the worst-case scenario, the collateral damage for the economy in the short term could be more than trivial.

The good news: Q3 is nearly over and so the window for further damage to economic data in the current quarter is closing fast. As for what to expect in Q4, well, that’s a different beast altogether, depending on what unfolds in Washington in the coming weeks.

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