Avoiding that “Technical Recession” — Evening Brief – 09.27.24
The probability of the US avoiding a National Bureau of Economic Research (NBER)-defined recession through the end of the third quarter remains high. The rationale for expecting a favorable trend to continue in the third quarter, and potentially beyond, is supported by a growing list of economic data.
Core PCE
The Federal Reserve’s preferred inflation barometer, the Core PCE Price Index, rose 0.1% month on month in August, less than the projected +0.2% and down from +0.2% in July, according to the Commerce Department’s Bureau of Economic Analysis report released on Friday. Annually, this equates to a 2.7% increase, in line with the consensus and up a tick from 2.6% previously.
The headline PCE Price Index increased 0.1% month on month, equaling the +0.1% predicted but falling from +0.2% in July. That amounts to a 2.2% annual rise, somewhat less than the predicted +2.3% and a notable decrease from +2.5% the previous month.
The numbers show that inflation is under control, giving the Federal Reserve more confidence that it is on track to meet its 2% objective. This will allow central bankers to continue to cut interest rates while focusing on the full employment component of their mandate.
Consumer Sentiment
The University of Michigan Consumer Sentiment Index increased to 70.1 at the conclusion of September, up from 69.0 in the middle of the month and 67.9 in August. Consumer Expectations registered at 74.4, compared to 73.0 in mid-September and 72.1 in August. Current Conditions increased to 63.3, compared to 62.9 and 61.3 the previous month.
The report also indicated that year-ahead inflation expectations remained unchanged at 2.7%, following four consecutive months of declines, and five-year-ahead inflation expectations remained at 3.1%.
“While sentiment remains below its historical average in part due to frustration over high prices, consumers are fully aware that inflation has continued to slow,” said Surveys of Consumers Director Joanne Hsu. “Sentiment appears to be building some momentum as consumers’ expectations for the economy brighten.”
GDP
In the second quarter of 2024, the US economy grew at a 3% annualized pace, according to the third estimate, a faster rate than the 2.9% expected.
The report is encouraging; however, it is deemed outdated because it covers April-June, yet it does show improvement in inflation while retaining solid growth in the second quarter. The Atlanta Fed Q3 GDP tracker currently shows growth of 2.9%, indicating that economic momentum has persisted into the third quarter.
At the same time, claims of a “technical recession”, when real GDP posts back-to-back quarterly declines according to the NBER, in early 2022 were refuted by upwardly revised data on annual gross domestic product, which was released on Thursday.
The Bureau of Economic Analysis reported that the revised figures indicate that output decreased only in the first quarter of 2022, in contrast to previous reports of consecutive quarterly decreases in the first and second quarters. GDP for the first quarter of 2022 is currently at -1.0%, while the GDP for the second quarter of 2022 is at +0.3%.
Real GDP increased by 2.5% in 2022, outpacing the prior forecast by 0.6 percentage points. That year marked the start of the Fed’s aggressive rate-hiking cycle to control inflation, with the federal funds rate raised 11 times between March 2022 and July 2023.
“The upward GDP revisions mean a higher personal saving rate and stronger productivity growth than previously thought. This doesn’t change the cyclical story much, but it adds to the narrative of a healthy structural backdrop and a relatively limited downside in any near-term recession scenario,” Bryan Jordan, chief strategist at Cycle Framework Insights, Inc., told Connect Money.