Tag: GDPNow

PCE Inflation Increases Slightly in September

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Today (December 5), the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index for September as part of its “Personal Income and Outlays” report. Release of the report was delayed by the federal government shutdown.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—with inflation measured as the percentage change in the PCE from the same month in the previous year. In September, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in August. Core PCE inflation in September was also 2.8 percent, down slightly from 2.9 percent in August. Both headline and core PCE inflation were equal to the forecast of economists surveyed.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while the figure below shows 1-month inflation.) Measured this way, headline PCE inflation increased from 3.1 percent in August to 3.3 percent in September. Core PCE inflation declined from 2.7 percent in August to 2.4 percent in September. So, both 1-month and 12-month PCE inflation are telling the same story of inflation somewhat above the Fed’s target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure). In addition, these data are for September and likely don’t fully reflect the situation nearly two months later.

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.6 percent in September, up from 2.4 percent in August. Core market-based PCE inflation was 2.6 percent in September, unchanged from August. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation increase sharply to 3.7 percent in September from 2.6 percent in August. One-month core market-based inflation increased to 2.7 percent in September from 2.0 percent in August. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.

Data on real personal consumption expenditures were also included in this report. The following figure shows compound annual rates of growth of real real personal consumptions expenditures for each month since January 2023. Measured this way, the growth in real personal consumptions expenditures slowed sharply in September to 0.5 percent from 3.0 percent in August.

Does the slowing in consumptions spending indicate that real GDP may have also grown slowly in the third quarter of 2025? Economists at the Federal Reserve Bank of Atlanta prepare nowcasts of real GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Atlanta Fed calls its nowcast GDPNow. As the following figure from the Atlanta Fed website shows, today the GDPNow forecast—taking into account today’s data on real personal consumption expenditures—is  for real GDP to grow at an annual rate of 3.5 percent in the third quarter, which reflects continuing strong growth in other measures of output.

In a number of earlier blog posts, we discussed the policy dilemma facing the Fed. Despite the Atlanta Fed’s robust estimate of real GDP growth, there are some indications that the labor market may be weakening. For instance, earlier this week ADP estimated that private sector employment declined by 32,000 jobs in November. (We discuss ADP’s job estimates in this blog post.) As the Fed’s policy-making Federal Open Market Committee (FOMC) prepares for its next meeting on December 9–10, it has to balance guarding against a potential decline in employment with concern that inflation has not yet returned to the Fed’s 2 percent annual target.

If the committee decides that inflation is the larger concern, it is likely to leave its target range for the federal funds rate unchanged. If it decides that weakness in the labor market is the larger concern, it is likely to reduce it target range by 0.25 percentage point (25 basis points). Statements by FOMC members indicate that opinion on the committee is divided. In addition, the Trump administration has brought pressure on the committee to cut its target rate.

One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) Investors’ expectations have been unusually volatile during the past two months as new macroeconomic data or new remarks by FOMC members have caused swings in the probability that investors assign to the committee cutting the target range.

As of this afternoon, investors assigned a 87.2 percent probability to the committee cutting its target range for the federal funds rate by 25 basis points to 3.50 percent to 3.75 percent at its December meeting. At the December meeting the committee will also release its Summary of Economic Projections (SEP) giving members forecasts of future values of the inflation rate, the unemployment rate, the federal funds rate, and the growth rate of real GDP. The SEP, along with Fed Chair Powell’s remarks at his press conference following the meeting, should provide additional information on the monetary policy path the committee intends to follow in the coming months.

Are We in a Recession? Depends on Which Forecast You Believe

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How do we know when we’re in a recession? Most economists and policymakers accept the decisions of the National Bureau of Economic Research (NBER), a private research group located in Cambridge, Massachusetts (see Macroeconomics, Chapter 10, Section 10.3). Typically, the NBER is slow in announcing that a recession has begun because it takes time to gather and analyze economic data. The NBER didn’t announce that a recession had begun in December 2007 until 11 months later in November 2008. When the NBER announced in June 2020 that a recession had begun in February 2020, it was considered to be an unusually fast decision.

On its website, the NBER notes that: “The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The NBER lists the data it considers when determining whether a recession has begun (or ended), including: “real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, manufacturing and trade sales adjusted for price changes, employment as measured by the household survey, and industrial production.” In practice, it is normally the case that an NBER business cycle peak coincides with the peak in nonfarm payroll employment and an NBER business cycle trough coincides with a trough in the same employment series.

Of course, policymakers at the Fed don’t wait until the NBER announces that a recession has begun when formulating monetary policy. Members of the Fed’s policymaking Federal Open Market Committee (FOMC) monitor a wide range of data series as the series become available. The broadest measure of the state of the economy is real GDP, which is only available quarterly, and the data are released with a lag. For instance, the Bureau of Economic Analysis’s “advance” (first) estimate of real GDP in the first quarter of 2025 won’t be released until April 30.

Given the importance of GDP, there are several groups that attempt to nowcast GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Federal Reserve Bank of New York and the Federal Reserve Bank of Atlanta both release nowcasts of GDP. They use different methodologies, so their forecasts are not identical. Today (March 3), the two estimates are surprisingly far apart. First, here is the nowcast from the NY Fed:

This nowcast indicates that real GDP will grow in the first quarter of 2025 at a 2.94 percent annual rate. That would be an increase from growth of 2.3 percent in the fourth quarter of 2024.

The nowcast from the Atlanta Fed—which they call GDPNow—is strikingly different:

The Atlanta Fed nowcast indicates that real GDP in the first quarter of 2025 will decline by 2.8 percent at an annual rate. If accurate, this forecast indicates that—far from the solid expansion in economic activity that the NY Fed is forecasting—the U.S. economy in the first quarter of 2025 will contract at the fastest rate since the first quarter of 2009, near the end of the severe 2007–2009 downturn (leaving aside the highly unusual declines in the first three quarters of 2020 during the Covid pandemic).

What explains such a large difference between these two forecasts? First, note that the Atlanta Fed includes in its graphic the range of forecasts from Blue Chip Indicators. These forecasts are collected from 50 or more economists who work in the private sector at banks, brokerages, manufacturers, and other firms. The graphic shows that the Blue Chip forecasters do not expect that the economy grew as much as the NY Fed’s nowcast indicates, but the forecasters do expect solid growth rate of 2 percent or more. So, the Atlanta Fed’s forecast appears to be an outlier.

Second, the NY Fed updates its nowcast only once per week, whereas the Atlanta Fed updates its forecast after the release of each data series that enters its model. So, the NY Fed nowcast was last updated on February 28, while the Atlanta Fed nowcast was updated today. Since February 28, the Atlanta Fed has incorporated into its nowcast data on the Institute for Supply Management (ISM) manufacturing index and data on construction spending from the Census Bureau. Incorporating these data resulted in the Atlanta Fed’s nowcast of first quarter real GDP growth declining from –1.5 percent on February 28 to –2.8 percent on March 3.

But incorporating more data explains only part of the discrepancy between the two forecasts because even as of February 28 the forecasts were far apart. The remaining discrepancy is due to the different methodologies employed by the economists at the two regional Feds in building their nowcasting models.

Which forecast is more accurate? We’ll get some indication on Friday (March 7) when the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report for February. Economists surveyed are expecting that the payroll survey will estimate that there was a net increase of 160,000 jobs in February, up from a net increase of 143,000 jobs in January. If that expectation is accurate, it would seem unlikely that production declined in the first quarter to the extent that the Atlanta Fed nowcast is indicating. But, as we discuss in this blog post from 2022, macro data can be unreliable at the beginning of a recession. If we are currently in a recession, then even an initial estimate of a solid net increase in jobs in February could later be revised sharply downward.

Latest PCE Report Shows Inflation Continuing to Fall

On September 27, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for August, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by annual changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.  

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, PCE inflation (the blue line) was 2.2 percent in August, down from 2.7 percent in July. Core PCE inflation (the red line) ticked up in August to 2.7 percent from 2.6 percent in July.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation declined from 1.9 percent in July to 1.1 percent in August, well below the Fed’s 2 percent inflation target. Core PCE inflation declined from 1.9 percent in July to 1.6 percent in August.  Calculating inflation this way focuses only on the most recent data, and so reinforces the conclusion that inflation has slowed significantly from the higher rates seen at the beginning of this year.

The following figure shows other ways of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.7 percent in August (calculated as a 12-month inflation rate), down only slightly from 2.6 percent in July—still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in August at 3.7 percent, the same as in July.

Today’s data indicate that the economy is still on a path for a soft landing in which the inflation rate returns to the Fed’s 2 percent target without the economy slipping into a recession. Looking forward, both the Federal Bank of Atlanta’s GDPNow forecast and the Federal Reserve Bank of New York’s GDP Nowcast project that real GDP will increase at annual rate of more than 3 percent in the third quarter (which ends in three days). So, at this point there is no indication that the economy is slipping into a recession. The next Employment Situation report will be released on October 4 and will provide more information on the state of the labor market.

Does the Latest GDP Report Indicate the U.S. Economy Is Entering a Period of Stagflation?

Arthur Burns was Fed chair during the stagflation of the 1970s. (Photo from the Wall Street Journal)

This morning, Thursday April 25, the Bureau of Economic Analysis (BEA) released its advance estimate of real GDP growth during the first quarter of 2024. The two most striking points in the report are, first, that real GDP increased in the first quarter at an annual rate of only 1.6 percent—well below the 2.5 percent increase expected in a survey of economists and the 2.7 percent increase indicated by the Federal Reserve Bank of Atlanta’s GDPNow forecast. As the following figure shows, the growth rate of real GDP has declined in each of the last two quarters from the very strong growth rate of 4.9 percent during the third quarter of 2023.  

The second striking point in the report was an unexpected increase in inflation, as measured using the personal consumption expenditures (PCE) price index. As the following figure shows, PCE inflation (the red line), measured as a compound annual rate of change, increased from 1.8 percent in the fourth quarter of 2023 to 3.4 percent in the first quarter of 2024. Core PCE inflation (the blue line), which excludes food and energy prices, increased from 2.0 percent in the fourth quarter of 2023 to 3.7 percent in the first quarter of 2024. These data indicate that inflation in the first quarter of 2024 was running well above the Federal Reserve’s 2.0 percent target.

A combination of weak economic growth and above-target inflation poses a policy dilemma for the Fed. As we discuss in Macroeconomics, Chapter 13, Section 13.3 (Economics, Chapter 23, Section 23.3), the combination of slow growth and inflation is called stagflation. During the 1970s, when the U.S. economy suffered from stagflation, Fed Chair Arthur Burns (whose photo appears at the beginning of this post) was heavily criticized by members of Congress for his inability to deal with the problem. Stagflation poses a dilemma for the Fed because using an expansionary monetary policy to deal with slow economic growth may cause the inflation rate to rise. Using a contractionary monetary policy to deal with high inflation can cause growth to slow further, possibly pushing the economy into a recession.

Is Fed Chair Jerome Powell in as difficult a situation as Arthur Burns was in the 1970s? Not yet, at least. First, Burns faced a period of recession—declining real GDP and rising unemployment—whereas currently, although economic growth seems to be slowing, real GDP is still rising and the unemployment rate is still below 4 percent. In addition, the inflation rate in these data are below 4 percent, far less than the 10 percent inflation rates during the 1970s.

Second, it’s always hazardous to draw conclusions on the basis of a single quarter’s data. The BEA’s real GDP estimates are revised several times, so that the value for the first quarter of 2024 may well be revised significantly higher (or lower) in coming months.

Third, the slow rate of growth of real GDP in the first quarter is accounted for largely by a surge in imports—which are subtracted from GDP—and a sharp decline in inventory investment. Key components of aggregate demand remained strong: Consumption expenditures increased at annual rate of 2.5 per cent and business investment increased at an annual rate of 3.2 percent. Residential investment was particularly strong, growing at an annual rate 0f 13.2 percent—despite the effects of rising mortgage interest rates. One way to strip out the effects of net exports, inventory investment, and government purchases—which can also be volatile—is to look at final sales to domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers declined only modertately from 3.3 percent in the fourth quarter of 2023 to 3.1 percent in the first quarter of 2024.

Looking at these details of the GDP report indicate that growth may have slowed less during the first quarter than the growth rate of real GDP seems to indicate. Investors on Wall Street may have come to this same conclusion. As shown by this figure from the Wall Street Journal, shows that stock prices fell sharply when trading opened at 9:30 am, but by 2 pm has recovered some of their losses as investors considered further the implications of the GDP report. (As we discuss in Macroeconomics, Chapter 6, Section 6.2 and Economics, Chapter 8, Section 8.2, movements in stock price indexes can provide some insight into investors’ expectations of future movements in corporate profits, which, in turn, depend in part on future movements in economic growth.)

Finally, we may get more insight into the rate of inflation tomorrow morning when the BEA releases its report on “Personal Income and Outlays,” which will include data on PCE inflation during March. The monthly PCE data provide more current information than do the quarterly data in the GDP report.

In short, today’s report wasn’t good news, but may not have been as bad as it appeared at first glance. We are far from being able to conclude that the U.S. economy is entering into a period of stagflation.

Can We Now Rule Out One of the Three Potential Monetary Policy Outcomes?

Federal Reserve Chair Jerome Powell (photo from bloomberg.com)

In a blog post from February of this year, we discussed three possible outcomes of the contractionary monetary policy that the Federal Reserve has been pursuing since March 2022, when the Federal Open Market Committee (FOMC) began raising its target range for the federal funds rate:

  1.  A soft landing. The Fed’s preferred outcome; inflation returns to the Fed’s target of 2 percent without the economy falling into recession.
  2. A hard landing. Inflation returns to the Fed’s 2 percent target, but the economy falls into a recession.
  3. No landing. At the beginning of 2023, the unemployment remained very low and inflation, as measured by the percentage change in the personal consumption expenditures (PCE) price index from the same month in the previous year, was still above 5 percent. So, some observers, particularly in Wall Street financial firms, began discussing the possibility that low unemployment and high inflation might persist indefinitely, resulting an outcome of no landing.

At the end of 2023, the economy appears to be slowing: Retail sales declined in October; real disposable personal income increased in October, but it has been trending down, as have real personal consumption expenditures; while the increase in third quarter real GDP was recently revised upward from 4.9 percent to 5.2 percent, forecasts of growth in real GDP during the fourth quarter show a marked slowing—for instance, GDPNow, compiled by the Atlanta Fed, estimates fourth quarter growth at 2.1 percent; and while employment continues to expand, average weekly hours have been slowly declining and initial claims for unemployment insurance have been increasing.

The slowing in the growth of output, income, and employment are reflected in a falling inflation rate. The following figure show the percentage change since the same month in the previous year in PCE price index, which is the measure the Fed uses to gauge whether it is hitting its 2 percent inflation target. (We discuss the reasons for the Fed preferring the PCE price index to the consumer price index (CPI) in Macroeconomics, Chapter 15, Section 15.5 and Economics, Chapter 25, Section 25.5.) The figure also shows core PCE, which excludes the prices of food and energy. Core PCE inflation typically gives a better measure of the underlying inflation rate than does PCE inflation.

PCE inflation declined from 3.4 percent in September to 3.0 percent in October. Core PCE inlation declined from 3.8 percent in September to 3.5 percent in September. Although inflation has been declining from its peak in mid-2022, both of these measures of inflation remain above the Fed’s 2 percent target.

But if we look at the 1-month inflation rate—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—we see a much sharper decline in inflation, as the following figure shows.

The 1-month inflation rate is naturally more volatile than the 12-month inflation rate. In this case, the 1-month rate shows a sharp decline in PCE inflation from 3.8 percent in September to 0.6 percent in October. Core PCE inflation declined less sharply from 3.9 percent in September to 2.0 percent in October.

The continuing decline in inflation has caused some economists and Wall Street analysts to predict that the FOMC will not implement further increases in its target for the federal funds rate and will likely begin cutting its target by mid-2024.

On December 1 in a speech at Spelman College in Atlanta, Fed Chair Jerome Powell urged caution in assuming that the Fed has succeeded in putting inflation on a course back to its 2 percent target:

“The FOMC is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

In terms of the three policy outcomes listed at the beginning of this post, the third—no landing, with the unemployment rate remaining very low while the inflation rate remains above the Fed’s 2 percent target—now seems unlikely. The labor market appears to be weakening, which will likely result in increases in the unemployment rate. The next “Employment Report” from the Bureau of Labor Statistics, which will be released on December 8, will provide additional data on the state of the labor market.

Although we can’t entirely rule out the possibility of a no landing outcome, it seems more likely that the economy will either make a soft landing—if output and employment continue to increase, although at a slower rate, while inflation continues to decline—or a hard landing—if output and employment begin to fall as the economy enters a recession.  Although a consensus seems to be building among economists, policymakers, and Wall Street analysts that a soft landing is the likeliest outcome, Powell has provided a reminder that that outcome is far from certain.

A Review of Recent Macro Data

Some interesting macro data were released during the past two weeks. On the key issues, the data indicate that inflation continues to run in the range of 3.0 percent to 3.5 percent, although depending on which series you focus on, you could conclude that inflation has dropped to a bit below 3 percent or that it is still in vicinity of 4 percent.  On balance, output and employment data seem to be indicating that the economy may be cooling in response to the contractionary monetary policy that the Federal Open Market Committee began implementing in March 2022.

We can summarize the key data releases.

Employment, Unemployment, and Wages

On Friday morning, the Bureau of Labor Statistics (BLS) released its Employment Situation report. (The full report can be found here.) Economists and policymakers—notably including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best indicator of the current state of the labor market.

The previous month’s report included a surprisingly strong net increase of 336,000 jobs during September. Economists surveyed by the Wall Street Journal last week forecast that the net increase in jobs in October would decline to 170,000. The number came in at 150,000, slightly below that estimate. In addition, the BLS revised down the initial estimates of employment growth in August and September by a 101,000 jobs. The figure below shows the net gain in jobs for each  month of 2023.

Although there are substantial fluctuations, employment increases have slowed in the second half of the year. The average increase in employment from January to June was 256,667. From July to October the average increase declined to 212,000. In the household survey, the unemployment rate ticked up from 3.8 percent in September to 3.9 percent in October. The unemployment rate has now increased by 0.5 percentage points from its low of 3.4 percent in April of this year. 

Finally, data in the employment report provides some evidence of a slowing in wage growth. The following figure shows wage inflation as measured by the percentage increase in average hourly earnings (AHE) from the same month in the previous year. The increase in October was 4.1 percent, continuing a generally downward trend since March 2022, although still somewhat above wage inflation during the pre-2020 period.

As the following figure shows, September growth in average hourly earnings measured as a compound annual growth rate was 2.5 percent, which—if sustained—would be consistent with a rate of price inflation in the range of the Fed’s 2 percent target.  (The figure shows only the months since January 2021 to avoid obscuring the values for recent months by including the very large monthly increases and decreases during 2020.)

Job Openings and Labor Turnover Survey (JOLTS) 

On November 1, the BLS released its Job Openings and Labor Turnover Survey (JOLTS) report for September 2023. (The full report can be found here.) The report indicated that the number of unfilled job openings was 9.5 million, well below the peak of 11.8 million job openings in December 2021 but—as shown in the following figure—well above prepandemic levels.

The following figure shows the ratio of the number of job opening to the number of unemployed people. The figure shows that, after peaking at 2.0 job openings per unemployed person in in March 2022, the ratio has decline to 1.5 job opening per unemployed person in September 2022. While high, that ratio was much closer to the ratio of 1.2 that prevailed during the year before the pandemic. In other words, while the labor market still appears to be strong, it has weakened somewhat in recent months.

Employment Cost Index

As we note in this blog post, the employment cost index (ECI), published quarterly by the BLS, measures the cost to employers per employee hour worked and can be a better measure than AHE of the labor costs employers face. The BLS released its most recent report on October 31. (The report can be found here.) The first figure shows the percentage change in ECI from the same quarter in the previous year. The second figure shows the compound annual growth rate of the ECI. Both measures show a general downward trend in the growth of labor costs, although compound annual rate of change shows an uptick in the third quarter of 2023. (We look at wages and salaries rather than total compensation because non-wage and salary compensation can be subject to fluctuations unrelated to underlying trends in labor costs.)

The Federal Open Market Committee’s October 31-November 1 Meeting

As was widely expected from indications in recent statements by committee members, the Federal Open Market Committee voted at its most recent meeting to hold constant its targe range for the federal funds rate at 5.25 percent to 5.50 percent. (The FOMC’s statement can be found here.)

At a press conference following the meeting, Fed Chair Jerome Powell remarks made it seem unlikely that the FOMC would raise its target for the federal funds rate at its December 14-15 meeting—the last meeting of 2023. But Powell also noted that the committee was unlikely to reduce its target for the federal funds rate in the near future (as some economists and financial jounalists had speculated): “The fact is the Committee is not thinking about rate cuts right now at all. We’re not talking about rate cuts, we’re still very focused on the first question, which is: have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2 percent over time, sustainably?” (The transcript of Powell’s press conference can be found here.)

Investors in the bond market reacted to Powell’s press conference by pushing down the interest rate on the 10-year Treasury note, as shown in the following figure. (Note that the figure gives daily values with the gaps representing days on which the bond market was closed) The interest rate on the Treasury note reflects investors expectations of future short-term interest rates (as well as other factors). Investors interpreted Powell’s remarks as indicating that short-term rates may be somewhat lower than they had previously expected.

Real GDP and the Atlanta Fed’s Real GDPNow Estimate for the Fourth Quarter

On October 26, the Bureau of Economic Analysis (BEA) released its advance estimate of real GDP for the third quarter of 2023. (The full report can be found here.) We discussed the report in this recent blog post. Although, as we note in that post, the estimated increase in real GDP of 4.9 percent is quite strong, there are indications that real GDP may be growing significantly more slowly during the current (fourth) quarter.

The Federal Reserve Bank of Atlanta compiles a forecast of real GDP called GDPNow. The GDPNow forecast uses data that are released monthly on 13 components of GDP. This method allows economists at the Atlanta Fed to issue forecasts of real GDP well in advance of the BEA’s estimates. On November 1, the GDPNow forecast was that real GDP in the fourth quarter of 2023 would increase at a slow rate of 1.2 percent. If this preliminary estimate proves to be accurate, the growth rate of the U.S. economy will have sharply declined from the third to the fourth quarter.

Fed Chair Powell has indicated that economic growth will likely need to slow if the inflation rate is to fall back to the target rate of 2 percent. The hope, of course, is that contractionary monetary policy doesn’t cause aggregate demand growth to slow to the point that the economy slips into a recession.