Weekly Economic Trends and Indicators

The Headline:

Last week, the Bureau of Economic Analysis (BEA) announced that real gross domestic product (GDP) increased at an annual rate of 5.2% in the third quarter. This is revised upward from the advance estimate of 4.9% released last month. In another release, the BEA announced that both personal income and personal consumption expenditures (PCE) increased by 0.2% in October. Additionally, the PCE deflator, the Fed’s preferred measure of inflation, was unchanged in October. The core PCE deflator (removing the volatile food and energy components) increased by 0.2% in October.

The Details:

As the report details, “The update primarily reflected upward revisions to nonresidential fixed investment and state and local government spending that were partly offset by a downward revision to consumer spending. Imports, which are a subtraction in the calculation of GDP, were revised down.”

Concerning the PCE deflator, the inflation rate over the last twelve months (Oct. ’22 to Oct. ’23) was 3.0%, down from 3.4% in the previous three months. Core PCE inflation over the last twelve months fell from 3.7% to 3.5%.

The Context:

With the next Federal Open Market Committee meeting now less than two weeks away, the financial markets spent much of the week trying to digest this new information and asking what impact this would have on the path of interest rates. There was little effect on expectations concerning the December meeting. It is a virtual certainty that rates will remain unchanged. However, according to the CME FedWatch Tool, the probabilities of a rate decrease in one of the first few meetings of the new year rose substantially.

While the strength of GDP does add a little fuel to speculation that the rate hikes are not done yet, it was the inflation data that really won the argument for now at least. The market seems skeptical of the Fed’s “higher for longer” rhetoric.

Fed Chair Jerome Powell, in prepared remarks at Spelman College on Friday, pushed back against the market, saying, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

Powell may be banking on the fact that he believes that if conditions deteriorate enough that rate cuts become necessary, they can and will act. However, the underlying strength of the economy, as evidenced by recent GDP growth and other data, still tells him that getting the last bit of inflation out of the economy will be difficult and will require a strong commitment to see the job through to the end.

Next week: November national employment report