July 27, 2023 | Kathy Bostjancic

GDP: Growth accelerates in Q2, well above potential

• The strong advance in Q2 real GDP growth reflects an economy that continued to run faster than its underlying potential growth rate, which the Fed estimates is 1.8%.  It is a key reason the Fed raised rates again yesterday.
• That said, the sturdy gain is within our expectations, and as such does not alter our view that with inflation gradually cooling and economic activity poised to slow in H2 2023 that the Fed can now hold rates steady into 2024. However, until the Fed sees evidence of the labor market easing and importantly inflation slowing, it will retain a hawkish leaning and the door remains open to further tightening if deemed necessary.
• The pickup in GDP growth to 2.4% in Q2 from 2% in Q1 was due to an acceleration in non-residential investment, up 7% annualized on the quarter, versus 0.6% in Q1. In the details businesses ramped up investment in equipment (+10.8%) and structures (+9.7%).  Investment in inventories also swung from a large drag on growth in Q1 (-2.4%) to a slight contribution of 0.1% in Q2.
• Real consumer spending slowed from a buoyant 4.2% gain in Q1 to a more moderate 1.6% advance, with expenditures on services leading the gain. Spending on services rose an annualized 2.1%  though slower than the 3.2% gain in Q1.
• Residential investment continued to be a drag on growth for the ninth straight quarter, falling 4.1%, despite the recent upturn in housing starts.
• As expected, core PCE inflation slowed noticeably from an annualized 4.9% advance in Q1 to a 3.8% increase, the slowest quarterly rise since Q1 2021. On a year-ago basis it decelerated from 4.7% to 4.4%. However, despite the improvement in the core inflation, the pace still remains too hot for Fed.  While they might not raise rates further, it will also lead officials to keep the policy rate at an elevated 5.25% - 5.5% range until early 2024.

 The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2023 Nationwide [NFM-22503AO]

July 26, 2023 | Kathy Bostjancic

FOMC rate increase: Fed leaves door open to more hikes if needed

• As fully anticipated the Fed raised the fed funds rate target to 5.25% - 5.5%.
• The minimal changes to the policy statement were in line with our expectation. The forward guidance remains unchanged as the committee leaves the door open to further rate hikes if inflation does not continue to trend lower. Our view is the Fed is likely done with rate hikes for this cycle since continued easing of inflation will passively lead to tighter policy as the Fed holds the nominal fed funds rates steady into 2024.
• Now we wait to hear from Powell at the press conference. We expect that Powell will aim to deliver clear guidance following the Fed’s muddle communications over the past few months. We also look for Powell to be less hawkish in tone then he was at the prior post-meeting press conference on June 14 since the June CPI data signal that core services inflation is finally showing signs of cooling. However, given that the rate remains elevated, Chairman Powell is likely to indicate that the Fed is going to be extremely vigilant in making sure inflation is indeed trending lower on a consistent basis and eventually back to the 2 percent target.
• Even if the Fed concludes its tightening for this cycle on Wednesday – which is our view - Powell will signal that Fed officials intend to keep the fed funds rate at a restrictive elevated level for some time to ensure inflation trends lower.

The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2023 Nationwide [NFM-22503AO]