Insights and Market Perspectives
COULD THE U.S. ECONOMY be growing at close to 6% this summer? The closely watched Atlanta Fed GDPnow released its latest guesstimate of economic growth yesterday — a red-hot 5.8% surge is possible this quarter, according to the forecasters.
WE TAKE THIS WITH A GRAIN OF SALT: The GDPnow survey has a mixed track record, and anything over 5% this quarter seems unlikely. But there’s no question that the economy is hitting on all cylinders.SURGING DEMAND was detailed this week in a Washington Post article headlined: “What Recession? This Summer’s Economy is Defying the Odds.”
THE ARTICLE CITED RED HOT DEMAND everywhere as spending surges in several areas. Consumers are spending on plastic surgery, cruises, pet care, Taylor Swift and Beyonce concerts, the “Barbie” movie, motorcycles and dozens of other discretionary outlays. Cruise bookings for 2024 are at an all-time high.
THIS SURGE OF PENT-UP SPENDING appears likely to avoid recession, which was a huge fear earlier this year; the big take-away now is that the economy has entered a period of unexpected expansion. With unemployment near 50-year lows, inflation edging down and wages rising faster than prices, businesses and families are still spending, keeping the labor market in very solid shape.
WARNING SIGNS; There are signs of potential trouble — Americans are taking on record levels of debt to fuel their spending, and delinquencies on mortgages and car loans are inching up. And there are persistent fears that the 10-year bond yield could continue to soar, eventually driving the economy into a slowdown.
FOUR IMPLICATIONS:
First, the Federal Reserve may have to stay tighter for longer, even though FOMC minutes released yesterday indicated an aversion to much more restraint.
Second, the U.S. appears to be in much better economic shape than China, Russia and much of Western Europe.
Third, continued strong GDP growth could help Joe Biden, who still looks vulnerable in the 2024 election.
Fourth, inflation remains the elephant in the room, as commodity prices surge and organized labor seeks dramatic wage gains.
BOTTOM LINE: At least one more rate hike seems likely this fall as the Fed — behind the curve as always — grapples with this unexpected economic surge. As for speculation on rate cuts later this year, that seems absurd. Rate cuts look unlikely for the rest of this year as GDP growth exceeds expectations.
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EDITOR’S NOTE: With Washington nearly deserted, we’ll publish only two or three times a week through the end of August.
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