It’s the Economy…

The Fed’s “recalibration” of monetary policy is more than just about shifting to rate cuts. It also involves where the policy maker is now placing its greater emphasis on setting the course for easing in the future. Rather than inflation being the primary driver in the decision-making process, labor market activity has now taken center stage, and with that, one could argue, for the Fed, it’s now about the economy.

So, let’s go to the videotape and see just how the broader economy has been doing here in 2024. Obviously, the main source of this information comes from the Bureau of Economic Analysis (BEA) in the guise of the Gross Domestic Product (GDP) report. Unfortunately, this data can be a bit backward-looking as we only have the numbers through the end of Q2. However, it can provide a useful guide as to how the underlying economy was faring heading into the second half of the year.

Put it this way, wouldn’t you rather see a relatively solid economic backdrop going into the final six months of 2024 than a landscape that could be teetering on a recession? That is exactly what the BEA data has revealed…the U.S. economy was, in fact, on relatively solid footing.

The BEA released its latest data a couple of weeks ago, which also included its annual revisions. The final result was that real GDP grew by +3.0% in Q2. Remember the alternate measure for growth we’ve written about in the past: gross domestic income or GDI. This figure was highlighted back in early 2022 when the real GDP number dipped into negative territory, but GDI actually came in on the positive side of the ledger. Well, in the newly revised data, Q2 real GDI was also revised upward to now show a +3.4% increase. This represented a noteworthy upward revision of more than two percentage points from the initial reading and followed on the heels of another significant upwardly revised gain of +3.0% in Q1 (prior +1.3%).

The prudent way to analyze this data is to calculate the average of real GDP and GDI. The result shows the U.S. economy growing at a +3.2% clip in the second quarter. Besides the two growth measures, arguably equally important to the future economic outlook is the underlying trend in the areas of personal income, spending and the savings rate. On that note, there were upward revisions to both income and spending, with the income component receiving the larger upward adjustment. As a result, the savings rate for Q2 now stands at 5.2%, or nearly two percentage points above the previous estimate of 3.3%.

This outcome is important because concerns were beginning to surface that households were losing their ability to spend, putting future consumption at risk. In fact, Fed Chairman Jay Powell mentioned these upward revisions in a public appearance just last week. Specifically, he highlighted how “GDP revisions remove downside risk to the economy” and that the “savings rate suggests consumers can continue spending.”

How about the future? As far as the Fed is concerned, the data released this month may be its last chance to see “clean” numbers not impacted by Hurricane Helene for a while. Indeed, oftentimes, potential economic disruption factors such as these impact the data not only from the negative side of the equation but then can get skewed the other way from the rebuilding process.

When taking into consideration the solid September jobs report, the Fed arguably has a different economic backdrop than was the case at last month’s FOMC meeting. This underscores the importance of being able to see underlying trends beforehand and could prove to be a crucial development in the decision-making process, especially for the November and December FOMC meetings.