Earlier this week, the Bureau of Economic Analysis (BEA) released data showing that real Gross Domestic Product (GDP) grew at an annualized rate of 2.8% in Q2, above expectations of 1.9% and a stark jump from the 1.4% realized in Q1. This growth was strengthened by consumer spending (which rose 2.3% year-over-year), with strong contributions from business investment and government expenditures. While this print, which was stronger than economists had predicted, underscores the resilience of the US economy despite higher borrowing costs, it also indicates the economy is far from overheating—a key component in the Federal Reserve’s efforts to engineer a “soft landing”.
Another key component of this elusive “soft landing” is inflation, which, according to this morning’s Personal Income and Outlays release from the BEA, slowed in June. The Personal Consumption Expenditures (PCE) price index—the Fed’s preferred gauge on inflation—was up 0.1% on the month (slightly above the change between April and May) and was 2.5% higher than one year ago (below the 2.6% annualized rate in May). Core inflation, which excludes volatile food and energy costs, rose 0.2% versus May (surpassing the April-to-May change of 0.1%) and 2.6% on the year. Both the headline and core measures aligned with expectations and marked another month where inflation inched closer towards the Fed’s 2% target. After the Consumer Price Index (CPI)—another gauge on inflation from the Bureau of Labor Statistics—showed inflation edging lower earlier this month, today’s PCE release signaled another successful step in the fight against escalating prices.
Alongside easing inflation came a slowdown in both earnings and spending growth. Personal income increased 0.2% in June compared to May, while disposable personal income, personal income less personal current taxes, increased 0.2% on the month (both below the April-to-May increase of 0.4%). Meanwhile, spending grew by 0.3%, exceeding the 0.2% estimate, while the savings rate fell to 3.4% (its lowest level since November 2022).
As the Fed continues to weigh when to cut rates from their 23-year high, this week’s data has certainly contributed to September potentially being the meeting in which they decide to do so. With overall economic growth remaining strong (but not too strong) and prices continuing to ease (albeit a little slower than some would like), the balancing act seems to be working, with the “soft landing” becoming less elusive. Fortunately for the Fed, they’ll have a few more data releases before that September meeting, and if they’re anything like today, a rate cut will be close to a certainty.
