The Fed has jacked up interest rates to over 5% to slow down this circus, and instead we’re getting accelerated growth.
By Wolf Richter for WOLF STREET.
We’ve been on a recession watch here for well over a year, the most-promised and most highly anticipated recession ever. For the markets — they really want that recession so that the Fed will cut rates and restart QE or whatever — it’s like “Waiting for Godot,” that infamous play of the early 1950s that was part of a movement called, “Theatre of the Absurd,” which makes total sense here. The play’s two characters are waiting for Godot, but Godot never arrives.
The Fed has jacked up interest rates to over 5% to slow down this circus, and we’ve been waiting for well over a year for this promised recession or soft landing or whatever, and instead we’re getting accelerated economic growth.
This surprising – this higher than feared – economic growth is not so surprising, actually, as the trillions of dollars that were printed and handed out during the pandemic are still circulating around out there at every level, and along with sharply rising wages, are getting spent, and are still fueling inflation and economic growth.
This higher than feared economic growth has shown up in all kinds of data, including today in the “third” estimate of GDP growth, released by the Bureau of Economic Analysis. It’s based on more complete data than the prior two estimates. Today’s revision, since we’ve been waiting for that recession, is special.
The GDP growth rate, adjusted for inflation – so “real GDP growth” – was raised to 2.0% annualized, much stronger than the market had feared, nearly double the growth rate of the first “advance” estimate (1.1%), and well above the second estimate (1.3%), on:
- Even stronger growth of consumer spending (our “drunken sailors”)
- Even stronger growth in government investment and consumption
- Less terrible trade deficit (“net exports”)
- Slightly smaller plunge of gross private domestic investment (buildings, machinery, etc.).
This 2% GDP growth is far above the Fed projection of 1% GDP growth for all of 2023, per its “Summary of Economic Projections” at its last meeting. These projections include the infamous dot plot where a large majority of participants see at least two additional rate hikes this year, if the economy and inflation wobble along as they expect. Alas, GDP growth so far has beaten those projections by a wide margin.
In response to this stronger than feared economic growth, Treasury yields surged as bond prices fell in anticipation of “even higher for even longer”: The 10-year yield jumped 15 basis points to 3.86%, and the two-year yield spiked by 18 basis points to 4.89% at the moment, the highest since the last trading day before the official beginning of the banking crisis:
I’ll just point at a few key items in today’s GDP data (all adjusted for inflation, so “real,” and annualized).
Consumer spending on goods and services jumped by 4.2%, the fastest growth rate since the stimulus checks went out in Q1 2021. I’ve been saying for months that consumers are spending like drunken sailors. And they sure did in Q1. This chart shows the seasonally adjusted annual rate of consumer spending in inflation-adjusted dollars. You can see the jump in Q1:
The Trade Deficit (“net exports”) in goods & services was less horrible, with exports rising faster at 7.8% (first estimate 4.8%), and with imports rising more slowly at 2.0% (first estimate 2.9%).
Exports add to GDP, imports subtract from GDP (net exports = exports minus imports = trade deficit). The ridiculous trade deficit during the pandemic was caused by consumers spending their stimulus money on imported goods, while exports had slowed. This distortion has been unwinding, and that’s a good thing, and it subtracts less from GDP, and it’s still horrible:
Government consumption and investment jumped by 5.0% (first estimate 4.7%), the third quarter in a row of increases, after five quarters of declines. This includes federal, state, and local governments, and they’re spending like drunken sailors too.
At the federal level, spending jumped by 6.0%, with a big increase from non-defense spending (+10.5%). State and local spending jumped by 4.4%.
Government consumption and investment does not include transfer payments and other direct payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), which are counted in GDP when consumers and businesses spend or invest these payments from the government.
Gross private domestic investment plunged by 11.9% (a little less terrible than the 12.5% plunge in the first estimate), having now worked off the entire pandemic spike:
About a month from now, the BEA will release its first estimate (the “advance” estimate) of second-quarter GDP growth. And the figures we’ve seen so far for Q2 give no indication of any kind of recessionary decline. On the contrary. And so this modern-day absurd play, “Waiting for the Recession,” will drag on for a while longer. And that makes sense, with these trillions of dollars that were printed and handed out during the pandemic still floating around out there at every level, and still getting spent, and still fueling inflation.
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