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? - 11 December 2020
Wells Fargo Economics & Financial Report / Dec 14, 2020
Emergency authorization of the Pfizer-BioNTech COVID vaccine appears imminent, but the virus is running rampant across the United States today, pointing to a grim winter.
This Week's State Of The Economy - What Is Ahead? - 01 May 2020
Wells Fargo Economics & Financial Report / May 04, 2020
U.S. GDP declined at an annualized rate of 4.8% in the first quarter, only a hint of what is to come in the second quarter.
This Week's State Of The Economy - What Is Ahead? - 03 May 2024
Wells Fargo Economics & Financial Report / May 10, 2024
The Federal Reserve can afford patience thanks to a resilient labor market. During April, total nonfarm payrolls rose by 175,000 net jobs, continuing a string of solid monthly payroll additions.
This Week's State Of The Economy - What Is Ahead? - 17 March 2023
Wells Fargo Economics & Financial Report / Mar 21, 2023
Retail sales declined 0.4% during February, while industrial production was flat (0.0%). Housing starts and permits jumped 9.8% and 13.8%, respectively.
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? - 24 March 2023
Wells Fargo Economics & Financial Report / Mar 29, 2023
The FOMC hiked the federal funds rate by 25 bps on Wednesday amid continued strength in the labor market and elevated inflation.
This Week's State Of The Economy - What Is Ahead? - 29 May 2020
Wells Fargo Economics & Financial Report / May 30, 2020
The beginning of this week saw some optimism that the economic downturn could be relatively short-lived, but data through the rest of the week provided grim reminder of the economic damage from COVID-19.
This Week's State Of The Economy - What Is Ahead? - 23 February 2024
Wells Fargo Economics & Financial Report / Feb 27, 2024
Stronger-than-expected inflation, underpinned by the mildly hawkish minutes from the January FOMC meeting, drove a move higher in mortgage rates.
This Week's State Of The Economy - What Is Ahead? - 16 October 2020
Wells Fargo Economics & Financial Report / Oct 20, 2020
Data continue to reflect an economy digging itself out of the lockdown-induced slump.
June 2020 Economy At A Glance
Wells Fargo Economics & Financial Report / Jun 18, 2020
The Fed expects to hold interest rates near zero through the end of this year, perhaps well into next year, and maybe even into ’22.
