This morning all the way in New York I could hear the gnashing of teeth from Jerome Powell’s office at the Federal Reserve. “What do we have to do to slow consumer spending in the Untied States?” he cried after this morning’s economic data.
Today the Commerce Department sharply raised its judgement on first quarter GDP growth. The last revision to the data showed the U.S. economy growing at a 2% annual rate from January through March. That was a huge step up from the 1.3% growth repoorted in the previous GDP estimate.
The blame (if that’s the right word) clearly rests on the U.S. consumer who just won’t stop spending even as the Federal Reserve raises interest rates and debt loads climb (with higher monthly payments to boot.)
The latest data showed consumer spending–which accounts for about 70% of the economy–rose at a 4.2% annual rate in the first quarter of 2023. That’s the higher rate of increase since April to June 2021
Today’s data doesn’t look like a statistical artifact, either. Retail sales rose last month despite pressure from still-high inflation and rising borrowing costs. Government reports show recent gains in new-home sales and orders for durable goods. Employers have added a healthy average of 314,000 jobs a month so far this year, with the unemployment rate, at 3.7%, still close to a half-century low. And today the Labor Department reported that the number of Americans applying for unemployment benefits fell last week by 26,000 to 239,000.
Yet, even if the economy isn’t slowing fast enough to suit a Federal Reserve focused on beating inflation back to 2%, the economy is slowing. The 2% growth ration the first quarter is a deceleration from the 2.6% rate in the fourth quarter of 2022 and the 3.2% rate in the third quarter of that year.
On the news of an unexpectedly positive revision to GDP growth, stocks climbed today with the Standard & Poor’s 500 closed up 0.45% and the Dow Jones Industrial Average ahead 0.50%. The NASDAQ Composite closed flat on the session and the NASDAQ 100 dipped by 0.16%. The small-cap Russel 22000 added 1.18%.
The yield on the 10-year Treasury toe 13 basis points to 3.84. That move pushed the increase in yields to a plus 4 basis points in the last month.
According to the CME Fed Watch Tool, the odds of a 25 basis point increase in interest rates at the Fed’s July 26 meeting rose t 86.8% today from 81.8% yesterday. Odds of two consecutive interest rate increases, 25 basis points in July and 25 basis points in September, moved up to 22.6% from 16.4% yesterday.
The CBOE S&P 500 Volatility Index (VIX) ticked upward by 0.15% to 13.45. There’s still very little near-term fear in this market, and therefore little demand for hedges.