GDP Highlights Solid Economy and Need for Patient Approach to Policy Pivot

This morning, GDP was unrevised at a 3.0% gain on an annualized basis in the final Q2 report, as expected and marking the largest gain in two quarters. The four-quarter average rose from 2.9% in Q1 to 3.0% in Q2.

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In the details of the report, personal consumption was revised slightly lower from a 2.9% rise to a 2.8% gain in the third-round Q2 report, still the largest increase in two quarters.

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Goods consumption was unrevised at a 3.0% increase in the final Q2 report, due to an upward revision in durables consumption from a 4.9% gain to a 5.5% rise, and a downward revision to nondurables consumption from a 2.0% gain to a 1.7% rise.

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Services consumption, meanwhile, was revised down from a 2.9% increase to a 2.7% rise, a three-quarter low.

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On the other hand, gross private investment – a gauge of business spending – was revised up from a 7.5% rise to an 8.3% gain, the largest quarterly increase since Q3 2023.

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Fixed investment was revised down from a 3.0% rise to a smaller 2.3% gain in the final Q2 report, the weakest quarterly pace since Q4 2022.

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Nonresidential investment – including office buildings and factories – was revised down from a 4.6% increase to a 3.9% gain, due to downward revisions in equipment investment from a 10.8% rise to a 9.8% gain, and intellectual property investment from a 2.6% gain to a 0.7% increase. Structures investment, on the other hand, was revised up from a 1.6% drop to a 0.2% rise in the third-round Q2 report, albeit still the weakest quarterly pace since Q4 2021.

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Residential investment, meanwhile, was revised down from a 2.0% decline to a 2.8% drop, marking the largest quarterly decline in five quarters.

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On the trade side, exports were revised down from a 1.6% gain to a 1.0% increase, while imports were revised up from a 7.0% gain to a 7.6% rise in the third-round Q2 report, the largest gain since Q1 2022.

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Finally, government consumption was revised up from a 2.7% gain to a 3.1% increase. Federal spending was revised up from +3.3% to +4.3%, with national defense spending revised higher from +4.9% to +6.4%, and nondefense spending was revised up from +1.2% to +1.5%. State and local spending, meanwhile, was unrevised at a 2.3% increase, the weakest pace in two years.

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In addition, the Core PCE Price Index was unrevised at a 2.8% gain in the final Q2 report, the weakest gain in two quarters.

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Bottom Line: A solid showing, at least in the rear-view mirror, of domestic?activity reinforces the need for a tempered?and patient approach to subsequent?rate reductions. With no indications of a downturn or mounting?weakness ahead, despite modest cooling in some reads on labor market momentum, the focus appears to be still on the lingering challenge?of returning?prices to a sustainable?2% level. While normalizing?conditions?do warrant?a less firm approach to policy?and a continuation?of rate reductions, a lack of meaningful?ongoing?disinflation supports?a base case of smaller 25bp cuts with a consideration, but not a commitment?to action at every upcoming meeting. As such, the next read on inflation will act as an unusually?large driver?of the Fed's next move come November and at year-end.?

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Tomorrow, after three months of holding steady, the core PCE may reverse course outright. According to the median forecast, the core PCE is expected to rise 0.2% in August, following a similar gain the month prior, and potentially increase 2.7% year-over-year. This would mark a potential uptick from the 2.6% annual increase in July, and certainly present a disappointing reality in the wake of the latest September rate cut announcement.

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The headline PCE, meanwhile, is expected to rise 0.1% in August following a 0.2% gain the month prior, and 2.3% on an annual basis, potentially marking a two-tenths of a percentage point decline from the pace reported in July.

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Also, this morning, durable goods orders were unexpectedly flat (0.0%) in August, following a 9.9% jump in July. According to the median forecast, durable goods orders were expected to drop 2.6%. Year-over-year, headline orders rose 1.5% in August, the largest annual gain in six months.

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Transportation orders fell 0.8% following a 34.7% increase the month prior. Excluding transportation, durable goods orders rose 0.5% in August and increased 1.0% over the past 12 months, up from the 0.7% annual gain the month prior.

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Capital goods orders fell 0.4% in August following a 34.7% rise the month prior. Nondefense capital goods orders, meanwhile, declined 1.3% following a 42.1% rise in July. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.2% in August, the strongest pace in two months. Year-over-year, however, business investment declined 0.1%, down from the 0.6% annual increase in July.

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In other details, fabricated metals orders climbed 0.6%, machinery orders gained 0.5%, and electrical equipment orders increased 1.9%. Also, primary metals orders rose 0.2%, and computers and electronics orders increased 0.4%.

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Additionally this morning, initial jobless claims fell from 222k to 218k in the week ending September 21, the lowest level in four months. The four-week average, meanwhile, declined from 228k to 225k. Continuing claims, or the total number of people claiming ongoing unemployment benefits, rose from 1.82M to 1.83M in the week ending September 14.

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On the housing front, this morning, pending home sales rose 0.6% in August, slightly less than the 1.0% gain expected. On an annual basis, pending home sales fell 4.3%, a slight uptick from the 4.6% annual drop in July.

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Finally, this morning, the Kansas City Fed Manufacturing Activity Index fell five points to a reading of -8 in September, the lowest reading in two months. According to the median forecast, the index was expected to decline to -5. In the details of the report, the volume of new orders fell two points to -14, and the number of employees declined from -7 to -11 in September, the lowest reading in two months. Also, shipments dropped 11 points to -12, and prices paid declined from +18 to +13, a three-month low.

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Yesterday, MBA mortgage applications rose 11% in the week ending September 20 following a 14.2% gain the week prior. The 30-year mortgage rate, meanwhile, fell 2bps to 6.13%, the eighth consecutive weekly drop and the lowest in two years. With a decline in mortgage rates, refinancing rates rose, increasing 20.3% in the week ending September 20, the highest level since April 2022.

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Also yesterday, new home sales fell 4.7% in August from 751k (revised up from 739k) to a 716k unit pace, a two-month low, albeit less than the 5.3% decline expected. Over the past 12 months, new sales rose 9.8%, the largest annual gain since October. Due to a fall in new sales, the months’ supply of new homes rose from 7.3 to 7.8 months. From a price standpoint, the median cost of a newly constructed home fell 2.0% from the month prior to $421k, down from $429k in July. Year-over-year, new home prices declined 0.1% in August.????????? ???

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Along with an updated look at inflation, tomorrow, we’ll take a look at the August personal income and consumption report. Personal consumption is expected to rise 0.3% in August and 5.0% on an annual basis, a potential downtick from the 5.3% annual gain in July, albeit still very solid on a nominal basis and well within the range established since May 2023. Income, meanwhile, is expected to rise 0.4% in August and 4.4% year-over-year, also marking a potential downtick from the July pace of 4.5%.?

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Also tomorrow, wholesale inventories, and the final University of Michigan Consumer Sentiment Index read for September.?

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-Lindsey Piegza, Ph.D., Chief Economist