July 27, 2023
Be it GDP or ECB, we have all your abbrevs covered today.
Situational awareness: Banking regulators unveiled a highly anticipated proposal for stricter capital rules for banks with at least $100 billion in assets. The Federal Reserve will hold an open board meeting on it this afternoon. Courtenay will be in the room; look for coverage on Axios.com.
Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 652 words, a 2½-minute read.
1 big thing: Resilient, not recessionary
With today's data showing the American economy continues to grow at a healthy clip, the single word to describe the U.S. economy is "resilient."
Why it matters: A range of indicators raise hopes that a potential recession remains far from reality. Economic activity is striking the delicate balance policymakers want to see: strong, but still moderating, activity.
What they're saying: "Economic growth continues to hold up better than had been anticipated late last year, and especially in the face of the fastest interest rate tightening cycle since at least 1970," Richard de Chazal, an economist at William Blair, wrote in a note.
By the numbers: Adjusted for inflation, GDP increased at a 2.4% annualized rate in the second quarter, picking up from Q1's 2% pace.
- An underlying measure of demand, which strips out the volatile categories like trade and inventories that don't signal much about the economy's health, was also solid.
- Real final sales to domestic purchasers increased at a 2.3% rate, a healthy pace that moderated from the 3.5% in the first quarter.
Details: Last quarter's strength boils down to consumer spending, the U.S. economy's bedrock. Personal consumption expenditures increased at a 1.6% annual rate, slowing from the 4.2% surge the prior quarter.
- That reflects a slower pace of spending on goods (0.7% versus the 6% in Q1) and services (2.1% compared to 3.2% in Q1). Overall consumer spending contributed 1.12 percentage points to growth last quarter.
The intrigue: Perhaps the biggest surprise in the report is a business investment boom that looks to be underway, at least in Q2.
- Non-residential fixed investment — spending on buildings, equipment, software and more — contributed nearly a percentage point to growth, the most since 2021.
- The shift from rapid-fire consumer spending to more business investment could be helpful on the inflation front as the Federal Reserve looks to chill consumer demand.
- Inflation as measured by the Fed's preferred Personal Consumption Expenditures Index remains too high, but continued to slow. That rose by 2.6% in the April-June period, down from a 4.1% gain in the first quarter.
Of note: The report came alongside others this morning that pointed to resiliency — a fact welcomed by stock market investors.
- Durable goods orders were stronger than expected in June, while weekly filings for unemployment dropped.
The bottom line: The economy, for now, is powering along. "If one was looking for evidence of a soft landing this report is about as good as it gets," writes RSM chief economist Joe Brusuelas.
2. ECB and Fed sing from the same hymnbook
The big news out of Frankfurt today was not that the European Central Bank raised its target interest rate another 0.25 percentage point, as had been well-telegraphed.
- It was the signal that the 19 countries of the eurozone could see the last of rising rates.
Driving the news: The ECB raised its target rate to 3.75%, the ninth straight increase, matching an all-time high for that rate from 2001. (The Fed's rate hike yesterday also brought rates back to 2001 levels.)
- And like the Fed, the ECB signaled that what happens at its September policy meeting is a genuinely open question.
What they're saying: President Christine Lagarde said officials have "an open mind as to what the decisions will be in September and subsequent meetings."
- "There is a possibility of a hike, there is a possibility of a pause," said Lagarde.
That sounded remarkably similar to Fed chair Jerome Powell's comment in his news conference yesterday that "it is certainly possible that we would raise the funds rate again at the September meeting if the data warranted, and I would also say it's possible that we would choose to hold steady at that meeting."
The bottom line: Leading central banks are entering a new phase in this cycle, no longer racing to push interest rates into restrictive territory.
- We are now entering a more see-how-it-goes approach that weighs whether more tightening is a genuinely open question.