By the numbers
• Today’s third release from the Commerce Department effectively closed the books on the economy for Q2 but offered little in terms of new insights.
• The report reiterated that the economy grew at a 3.0% annualized pace in the second quarter, lifted by strong consumer spending and better business investment, despite ongoing weakness in housing.
• The report is largely old news though, even with the proverbial ink still wet given other significant developments in the economy since June.
Broad thoughts
• Against the backdrop of the ongoing soft versus hard landing debate, the report offered little new news but did nothing to push back against a benign, if not universally solid, economic backdrop for 2024.
• The economy accelerated in the second quarter and appears well positioned to extend that momentum when the first estimate of third quarter growth is released next month.
• That momentum hasn’t carried through to the labor market though, as job creation has slowed and the unemployment rate has ticked higher over the past year. Even so, layoffs remain quite low, as reiterated by the moderate decline in claims last week to 218,000.
• Stronger worker productivity has supported growth, offsetting the potential drag from a more lackluster hiring environment.
• At the same time, inflation continues to recede at a reasonable pace, lifted predominantly by persistent increases in shelter costs. Other timely data on rental rates and home prices provide reason to expect that CPI-based measures of shelter costs should moderate further over the coming year.
Where economic growth goes from here
• GDP is always a backward-looking indicator of the relative health of the economy, limiting the usefulness of today’s report. Given other more timely data, the outlook from here remains cautiously optimistic.
• The prevailing narrative has swung sharply toward a benign soft-landing scenario in recent months, most recently reinforced by the Fed’s half-point interest rate cut and accompanying message.
• A pronounced risk-on mood in equity markets was a strong indicator that investors not only embraced the Fed’s move but heard the central bank’s message: that a more aggressive pace for rate cuts isn’t needed to save a sinking economy but is a possible due to the rapid retreat of inflation.
• Even so, cracks have appeared in parts of the economy that merit close monitoring, leaving the door open to a more notable slowdown.
• Whether or not the current Fed will demonstrate better timing and calibration in easing policy than many of its predecessors did remains to be seen.
• For now at least, the markets appear to be buying in and the selective weak spots in economic data hasn’t been enough to poke holes in the Fed’s argument.
The bottom line?
• Revised Q2 GDP data is old news but puts a nice bow on the economic data for the first half of the year. More recent data may not be universally and unambiguously positive, but the underlying tone is enough to nurture a cautious optimism that the expansion may still have enough energy to continue to run as the Fed gradually removes its policy foot from the brakes.
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