The US economy has managed to surprise most economists with its resilience, and now seems poised to outright jump ahead. This is despite two major factors that would otherwise imply poor economic performance: High interest rates and a bout of high inflation.
But, US consumers have proven to be much stronger than expected, buoying the economy. Can this last? What does it mean for the Fed rate decision next week? Can the dollar push higher, or is the high water mark already in?
There is Wrinkle in the Future
The market seems to be celebrating, with the stock market gaining substantially so far this year, and the dollar being strong since the summer. But, there are some worrying signs. The US consumer has propelled the economy forward in a period when real wages were shrinking. This is reflected in growing credit card debt, which isn’t sustainable after household debt reached a new record high. Additionally, households who managed to save up during the pandemic have been running down their savings, as the CEO of JPMorgan Jamie Dimon has warned.
Then we have the issue of the government, which is on a wild spending spree, with budget deficits more than doubling the pre-pandemic period. At the start of the year, Federal spending was somewhat hampered as the government reached its debt ceiling. Q2 outlays were virtually unchanged compared to Q1, with many of those obligations being shunted forward. Since the ceiling was lifted, the Federal government has borrowed over $1.0T, and covered back payments from the ceiling period. That counts as economic activity as far as calculating the GDP is concerned, which could help boost the number in the third quarter.
What the Data Says
The consensus forecast for the US Q3 GDP growth rate is an annualized 4.0%, up from the 2.1% reported in Q2. For comparable purposes, that’s around 1.0% quarterly growth. The Fed’s GDPNow estimator forecasts that GDP Grew at a 5.4% annual rate. In the past, when there has been a discrepancy between the consensus and the Fed, typically it’s the latter number that comes out as the most accurate prediction.
What that means is that we could see a large beat on expectations on Thursday, but that doesn’t mean there will be such a strong market reaction. That’s because investors are not just looking at the consensus, but also the Fed’s estimate, as well. Also, at the same time, we get the release of other key data, such as Durable Goods Orders for September, which is expected to jump at a 0.7% rate compared to 0.2% prior. That could shake up the market a little bit as well.
Potential Market Reaction
The main issue for how traders react is still likely to come down to the disagreement between the Fed and the market about whether or not there will be a rate hike at the December meeting. Last week, Fed Chair Powell all but confirmed there won’t be a rate hike at the next meeting in November.
But, a substantial increase in the GDP, which would translate into more inflationary pressure, would likely be seen as supporting the Fed’s view that one more hike is necessary. While that might support the dollar in the rates department, better economic performance implies more tax receipts for the government, which could alleviate some of the pressure on bonds. The result for the dollar after the data release could be a bit mixed.
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