While last week's high-octane schedule of Fed communications cemented expectations to the start of an easing cycle at next month's FOMC meeting, market participants and policy watchers are still on the lookout for clues and confidence as to the size of that well-telegraphed rate cut signal. Unfortunately, this week's economic indicator lineup, which broadly beat expectations and reaffirmed an economic soft landing, provides limited insight to that open question.
One of those indicator beats was the second look at Q2 GDP. Real GDP growth was revised up by two-tenths to a 3.0% annualized rate in the second quarter, reflecting a substantial upward revision to personal consumption expenditures (PCE) and partially offsetting downward revisions to business fixed investment, residential investment and government spending. Revisions to PCE were broad based across the goods and services components and make it less clear that the restrictive interest rate environment is poising a major impediment to household spending. In fact, the revised estimates point to ongoing resilience within the American consumer and sustained momentum for Q3 PCE.
To that point, today's personal income & spending report—the most pertinent indicator on the week to monetary policy revealed the third quarter is off to a compelling start. For July, personal income rose 0.3% on the month, reflecting a corresponding gain in wages & salaries. Personal spending increased 0.5% on a nominal basis, and real personal spending was up 0.4% on the month. On the inflation front, the broad narrative of continued disinflation remains unchanged. Both the headline and core PCE deflators matched expectations, rising 0.2% on the month and maintaining the year-over-year rates at 2.5% and 2.6%, respectively. The three-month annualized rates for the headline and core PCE deflators, at 0.9% and 1.7%, respectively, are now below their year-ago rates and suggest momentum continues to trend in an encouraging direction for the Fed.
Bottom line, July's performance sets up for continued solid spending growth in Q3 and furthers the narrative a soft landing may be achieved. That said, consumption growth is set to moderate over the remainder of the year and into 2025 amid a weakening labor market and slower wage growth. We continue to stress that household spending is heavily dependent on income growth, which is losing momentum. As we anticipate the labor market to moderate more significantly over the remainder of the year, we expect real disposable income growth to soften further, and bring with it a slower pace of consumer spending.
Elsewhere in the economy, advance durable goods orders surprise to the upside in July, as new orders surged 9.9% following a 6.9% contraction in June. The gain was primarily driven by civilian aircraft, as orders excluding transportation slipped 0.2% on the month. Softness was broad based and points to a sluggish environment for capital expenditures in the near term. Looking ahead, we suspect a rebound in capital expenditures is coming as policymakers embark on a rate-cutting cycle. However, it will take some time for the accommodation of lower interest rates to filter through to the real economy and underpin greater broad-based order demand.
Monetary Policy Focus Decisively Turns Toward the Labor Market
Unless there is an outsized move in activity or inflation, Fed officials are increasingly focusing on the labor market as they evaluate the appropriate level for monetary policy. Last week at the Jackson Hole gathering, Chair Powell firmly emphasized the Fed's tolerance for labor market cooling had reached its limit and any further weakness would be “unwelcomed.” Therefore, any updates received on that front, including weekly initial jobless claims, employment components from business and consumer surveys, and the nonfarm employment report will be key measures to monitor for guidance in regard to the cadence and magnitude of anticipated rate cuts.
While this week's performance did little to change the monetary policy calculus, the coming week brings a top-tier set of data releases that may cement expectations for the Sept. 18 FOMC meeting (see our U.S. Outlook section). If realized, further labor market weakness resulting from softening monthly payroll figures and a rising unemployment rate would likely boost the roughly one-in-three chance the market is pricing in for a 50 bps cut next month. A payroll rebound and lower unemployment rate, however, would likely suggest the Fed does not have to act boldly, with expectations solidifying further on a more measured 25 bps cut. Either way, next Friday's employment report—along with the release of August CPI/PPI in the following week—will go a long way toward determining the actions taken and signals sent by the FOMC at next month's policy meeting.
This Week's State Of The Economy - What Is Ahead? - 27 October 2023
Wells Fargo Economics & Financial Report / Nov 02, 2023
The U.S. economy expanded at a stronger-than-expected pace in Q3, with real GDP increasing at a robust 4.9% annualized rate.
This Week's State Of The Economy - What Is Ahead? - 28 October 2022
Wells Fargo Economics & Financial Report / Oct 31, 2022
Headline GDP continues to send mixed signals on the direction of the U.S. economy. During Q3, real GDP rose at a 2.6% annualized rate, ending the recent string of quarterly declines in growth registered in the first half of 2022.
This Week's State Of The Economy - What Is Ahead? - 03 November 2023
Wells Fargo Economics & Financial Report / Nov 08, 2023
Although payroll growth is easing, the labor market remains relatively tight. The unemployment rate inched up to 3.9% in October, slightly higher than the cycle low of 3.4% first hit in January 2023, but still low compared to historical averages.
This Week's State Of The Economy - What Is Ahead? - 16 September 2022
Wells Fargo Economics & Financial Report / Sep 20, 2022
Financial markets reacted in a zig-zag pattern to this week\'s economic data ahead of the next FOMC meeting. Price pressure is still not showing the sustained slowdown the Fed needs before it takes its foot off the throttle of tighter policy.
This Week's State Of The Economy - What Is Ahead? - 12 April 2024
Wells Fargo Economics & Financial Report / Apr 18, 2024
The March consumer price data dominated the economic discussion this week and are the latest to support that the timing and degree of Fed easing will be later and smaller than many of us previously expected.
2021 Annual Economic Outlook
Wells Fargo Economics & Financial Report / Dec 16, 2020
The longest U.S. economic expansion since the end of the Second World War came to an abrupt end earlier this year as the COVID pandemic essentially shut down the economy.
This Week's State Of The Economy - What Is Ahead? - 21 February 2020
Wells Fargo Economics & Financial Report / Feb 22, 2020
Minutes from the January 28-29 FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates, and for the most part housing and manufacturing survey data this week supported that view.
This Week's State Of The Economy - What Is Ahead? - 24 July 2020
Wells Fargo Economics & Financial Report / Jul 25, 2020
Initial jobless claims rose to just over 1.4 million for the week ending July 18. Continuing claims fell to about 16.2 million. Initial claims edging higher suggests that the resurgence of COVID-19 may be taking a toll on the labor market recovery.
This Week's State Of The Economy - What Is Ahead? - 14 January 2022
Wells Fargo Economics & Financial Report / Jan 18, 2022
As you may have already seen, inflation is running almost as hot as the stock of our favorite bank. The Consumer Price Index (CPI) rose 7.0% year-over-year in December, the fastest increase in nearly 40 years.
This Week's State Of The Economy - What Is Ahead? - 10 November 2023
Wells Fargo Economics & Financial Report / Nov 16, 2023
Sometimes, the impact of higher rates is quite obvious, such as the series of bank failures that occurred earlier this year.
