Weekly Economic Trends and Indicators
The Headline:
Last Thursday, the Bureau of Economic Analysis (BEA) reported that 3rd quarter gross domestic product (GDP) grew at an annual rate of 4.9 percent after adjusting for inflation. On Friday, the BEA reported that personal income was up 0.3 percent in September, in line with the trend of the last few months. The personal consumption expenditures (PCE) deflator, the Federal Reserve’s preferred measure of inflation, rose 0.4 percent in September for an increase of 3.4 percent over the last twelve months, still well above the desired level of inflation.
The Details:
Digging into the details of the GDP report, we note that the largest contributors to GDP in the 3rd quarter were personal consumption and an increase in inventories. Consumption contributed 2.7 percent to the total while increases in inventories contributed 1.3 percent. This is noteworthy for two reasons. First, the strength of the consumer is still, at least for now, a very real positive influence on the economy. The question is how long that can continue. Higher interest rates have not deterred consumers from purchasing durable goods and spending on recreation. However, as student loan payments resume and we start to feel the pinch of an extended period of higher rates, most analysts expect some cooling of consumption spending.
Second, an increase in inventories can be a signal that production is ahead of sales, implying a coming slowdown in production. This signal is not perfect, however, as inventories are quite volatile and can fluctuate for a number of reasons. Yet, the preponderance of evidence suggests that a slowdown in manufacturing is underway due to higher interest rates.
The Context:
Earlier in the quarter, few analysts would have expected such robust growth. However, the “GDPNow” forecasting model from the Atlanta Fed saw it coming early. In the QC Chamber’s most recent Quarterly Market Report published last month, we cited their forecast which was 4.9 percent at that time while most forecasters expected around 3 percent. (In fact, most of those forecasters expected about zero percent growth for this quarter when surveyed in June).
While robust growth might ordinarily prompt the Fed to raise interest rates further, that is unlikely this time. Growth in the 4th quarter is expected to cool back down to a more normal rate. (As of today, GDPNow predicts 2.3 percent for the 4th quarter.) As a result, the Fed should not have to do much more heavy lifting. According to the CME FedWatch Tool, the probability of a rate hike at the Fed’s meeting this week is approximately zero. In fact, they put the probability of no changes in rates as the most likely outcome well into next year. The market seems to have received the message that the Fed intends to leave rates at this level for an extended period of time, although one more increase would not be surprising if inflation continues to stay above 3 percent. Expect a rate cut only when inflation is closer to 2 percent or if the risk of a recession increases significantly.
Next week: US employment report for October and Fed meeting recap.
