Weekly Economic Trends and Indicators

The Headlines:

Last Wednesday, the Bureau of Economic Analysis (BEA) reported that U.S. gross domestic product (GDP), adjusted for inflation, grew at a seasonally adjusted annual rate of 2.8% in the third quarter. This was below expectations, which were generally for a rate of 3.0% or more. This was also down from the final estimate of 3.0% in the second quarter.

In a separate release on Thursday, the BEA reported that the personal consumption expenditures (PCE) price index increased by a seasonally adjusted 0.2% in September. Excluding the volatile food and energy components, the core PCE price index increased by a seasonally adjusted 0.3%, the largest monthly increase since April. Over the last twelve months, the overall PCE inflation rate was 2.1%, while the core PCE inflation rate remains stubbornly high at 2.7%.

The Details:

GDP growth was led by personal consumption expenditures (up 3.7%) and government expenditures (up 5.0%). Gross domestic private investment only grew by 0.3%, the lowest growth rate in that category since the first quarter of 2023. Investment in nonresidential structures as well as residential investment both declined. Both exports and imports saw large increases (8.9% and 11.2%). However, since imports grew faster than exports, this represents a net negative impact on GDP growth.

The Context:

While the strength of consumption spending is noteworthy, the declines in investment in structures signal additional softening of the economy. At the same time, had it not been for rather substantial declines in energy prices, the inflation number could have been significantly worse.

The market’s response to this news was swift and decisive. The 10-year Treasury yield jumped 12 basis points between Tuesday and Friday of last week. As of Friday (November 1), the 10-year sat at nearly a 4.39% yield which is the highest since July. Additionally, the market’s implied probability of a 25-basis point cut in the fed funds rate when the Federal Open Market Committee meets next week was over 96% (as of Nov. 1).

The explanation for this is that the softening in the economy demands further rate cuts. However, the fact that inflation remains stubborn increases the concern that the rate cuts that are necessary to put the “soft” in “soft landing,” could also put upward pressure on inflation. The 10-year yield is one of the best barometers of inflation expectations, hence the immediate large jump in yield.

For its part, the Fed may not have much choice but to continue the cuts as long as signs of a possible slowdown remain. However, it may cause the pace of rate cuts to slow as we get into next year. The real (inflation-adjusted) interest rate is still restrictive enough that the first few cuts are unlikely to cause runaway inflation. While this week’s news was not entirely positive, in the larger context it was not entirely negative either.

Next week: National/regional labor market conditions