Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today’s article covers economic growth, the Fed, and jobless claims– a trifecta of economic news for my loyal readers!
Economic Growth Better than Expected in the Second Quarter
Gross Domestic Product—the value of all goods and services produced in the U.S.—rose at a 2.4% annual rate in the second quarter, beating the 2% Dow Jones estimate. That’s great news that should help calm recession fears for at least a few months.
Consumer spending—which accounts for roughly 70% of GDP—rose at a 1.6% annual pace, down from 4.2% in 1Q23, but still a decent number. I continue to be amazed that Americans can keep spending money at this pace, but maybe I shouldn’t be.
A paper released in May by the San Francisco Fed said there was still about $500 billion in excess savings that Americans had accumulated during the pandemic. That savings—along with a big increase in credit card debt—has enabled people to keep spending, even with the huge spike in inflation. And now that wages are finally rising faster than prices, consumers will have more money to spend in the coming months.
The bottom line here is economic growth was decent in 2Q23, and there is no recession coming this year.
The Federal Reserve Hikes 0.25%
In a move that surprised nobody, the Fed announced it was raising short-term rates by 25 basis points. This now puts the federal funds rate at its highest level in 22 years, at a range of 5.25%-5.5%. I still don’t understand why they didn’t hike in June, but I guess that doesn’t matter now.
In his press conference after the announcement, Chairman Powell wouldn’t say how many more hikes to expect this year. Based on the Fed’s economic projections released last month, we should see one more 25-basis-point increase before they stop. The only thing we know for sure is there will be no rate hike next month, as they don’t meet again until September.
I was very critical of the Fed for waiting too long to act on inflation, but it does appear their dramatic rate hikes since last March are doing the trick. Inflation fell from a 9% annual rate last June to just 3% last month. That’s certainly progress, even though it has come at a high price for many Americans. Another good sign in the fight against inflation is that since peaking in April 2022, the money supply—remember that inflation is all about money—has fallen 6%.
Jobless Claims Fall to Lowest Level Since February
Initial claims for unemployment declined to 221,000 last week, their third-straight weekly decline and the lowest total in five months. Continuing claims also fell to their lowest level since February, so this is a double shot of good news.
There continues to be no quit in the labor market, despite the daily barrage of layoff announcements. In next week’s column, we will be covering the July jobs report, so be sure to tune in.
