Thursday brought still more evidence of US economic resilience in the face of an ostensibly aggressive rate-hiking campaign.
Jobless claims plunged in the week to June 24, and the final read on Q1 GDP showed the economy expanded at a much brisker pace than initially reported.
Taken together, and considered with what one popular strategist described as a near “perfect” run of housing and confidence numbers released earlier this week, traders and policymakers were left to yet again ponder the possibility that notwithstanding “long and variable lags,” monetary policy isn’t yet restrictive, even after 500bps of tightening.
The economy expanded at a 2% annual rate to start 2023, the BEA said Thursday. That was nearly double the first estimate and up sharply from the second estimate, which you’ll recall was 1.3%.
Do note: The Atlanta Fed’s GDPNow tracker stood at 1.8% for Q2 as of Tuesday.
None of that’s consistent with the Fed’s inflation-fighting efforts. They need below-trend growth. And for several quarters.
As you can imagine, the personal consumption print for Q1 was revised up meaningfully. It was 4.2% in the final read.
The final read was half a percentage point above the advance estimate, and counts as very robust.
Yes, the figures are backward-looking. And yes, the going assumption continues to be that policy acts on a lag. And finally, yes, it’s true that if past cycles are any indication, we’re just now entering the period during which the Fed’s push into restrictive territory should be expected to start showing up in the data.
However, conspicuously absent from the discussion in 2023 are last year’s talking points about how the lags might be shorter in modernity given how quickly financial conditions respond to policy tightening. What accounts for the disappearance of that narrative? I can tell you: If the lags are shorter than they once were, it’s possible the worst of the drag has come and gone. If that’s true, and the Fed wants to exert more drag, they’ll need to re-escalate, and not just with one more 25bps move in July.
A lot of the incoming evidence seems to support that theory. Housing is picking back up. Core inflation has stopped coming down. Consumption hasn’t really abated. The unemployment rate is 3.7% after a 0.3% one-month increase. And on and on. With apologies, we may be waiting on something (i.e., a material deceleration in growth) that simply isn’t going to happen absent another aggressive hiking push.
The decline in initial claims to 239,000 broke a three-week stalemate during which claims were parked at the highest levels since October of 2021. The 26,000 decline was the largest since — wait for it — October of 2021.
For what it’s worth (which is self-evidently nothing) not a single economist out of nearly four-dozen predicted an initial claims print below 255,000. So, the most optimistic guess was 16,000 higher than the actual number.
It was a holiday week, so I wouldn’t want to make too much of the drop, but then again, the 42 economists who ventured a guess presumably knew there was a holiday involved. Actual, unadjusted initial claims fell 18,000 to 233,000.
Continuing claims in the week to June 17 likewise undershot.
perfect. ‘I’d like to have seconds on the last 6 months please’. rates higher, stocks higher, employment better, continued concern that theres a recession somewhere b/c ya know yield curve, maybe next month or quarter. its when the curve normalizes is the problem. as long as mkts perceive continued rate increases, the curve wont normalize.
The Fed is seemingly going to be faced with a really big choice, “Volcklerize” the rising rates program, which risks breaking some more and larger banks, or find other tools that will tighten without so much collateral damage. I prefer the latter because it seems to me the structure of our current inflation driving mechanism is not as simple as Friedman would have thought it to be. Too many exogenous factors this time around.
“…current inflation driving machine..” ? Inflation has been falling and falling….short term rates are now higher than inflation. What is the need for further tightening? Labor getting too much of its share of gdp and the capitalists arent used to sharing? Seriously though, why tighten further? the 2% inflation era was the anomaly. population growth plus efficiency/productivity gains (thanks tech!) really should put money supply growth at around 3-4%
The issue will be in July when they skip again in light of further declines in PCE and CPI….then we start to see the possiblity of the yeild curve normalizing….short rates ease a little…and long rates begin to drift higher.
Pce inflation number looms even larger now. An inflationary print would be a nail in the coffin for bonds. Not my bet, but if it happens you likely see a 4 handle 10 yr
sure and when was the last two-in-a row upticks in PCE? Sept and July 22, prior to that was before Feb 22. All the while Fed has been tightening via rates and cpi and pce havw been coming down. they say theres a lag on Fed rate increase prior to showing up in the economy. Given there has been no stops/skips until just now…..its difficult to see a PCE that pops higher, if it did sure, markets wouldnt like it….but who’s really thinking ‘this month will be differenct bc ‘x’. ?
A 4 handle on the 10 is a distinct possibility. People have jobs and are spending. I think it’s called Keynesian economics.
Frankly, if banks can’t handle a 6+% Fed Funds rate, maybe we should nationalize the institution of banking. If the US Government is going to bail banks out when all is said and done, the US Government might as well own them.
or run the banking industry like Utilities. but that will never happen.