The Federal Reserve abandoned “data dependent” – at least for next week’s FOMC meeting. December futures imply a 1.78% Fed funds rate, up six bps for the week but still 62 bps below today’s 2.40% effective rate. Unless the Federal Reserve has completely caved to the markets, the Committee statement and Chairman Powell’s press conference should emphasize its commitment to “data dependent” and the possibility of a second-half recovery in growth momentum. By the reaction to Draghi’s marginally less than super-duper dovishness, markets will not be overjoyed if the Fed attempts walking back its “an ounce of prevention…” “insurance” rate cut cycle.
For posterity, I’ll document the data backdrop heading into what is widely believed to be the beginning of a series of cuts. Second quarter GDP was reported at a stronger-than-expected 2.1% rate, down from Q1’s 3.1% but ahead of the 1.8% consensus forecast. Personal Consumption bounced back strongly, jumping to a 4.3% annual rate from Q1’s 0.9%. It’s worth noting there have been only four stronger quarters of Personal Consumption growth over the past 13 years.
Personal Income increased 5.4% annualized, down from Q1’s 6.1% – but strong nonetheless. Employee Compensation expanded 4.7% annualized. Receipts on Assets (Interest Income and Dividend Income) increased 9.0% annualized, more than reversing Q1’s 6.1% annualized contraction. Overall Disposable Income increased an annualized 4.9%, up from Q1’s 4.8% and Q4 ‘18’s 4.2%.
Government Spending jumped to a 5.0% annualized growth rate (Q1 2.9%), led by a 7.9% annualized expansion in federal government expenditures (strongest reading since Q2 ’09). With federal deficit spending near 4.5% of GDP, fiscal stimulus has become a powerful force in the real economy.
Dropping 5.2%, Exports were a drag on growth. Reversing Q1’s 6.2% growth rate, Gross Private Investment declined 5.5% annualized. Non-Residential Fixed Investment declined 0.6%, with Residential Investment down 1.5%.
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