The US economy continues to expand in all sectors—with consumers as well as in manufacturing. But it was consumers that provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth, I said recently.
And now the Atlanta Federal Reserve’s advance estimate of third quarter economic growth just jumped to 4.1 percent. How is that possible with Fed Chair Powell hinting at further rate hikes in his latest remarks?
“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 4.1 percent on August 8, up from 3.9 percent on August 1. After recent releases from the US Census Bureau, the Institute for Supply Management, the US Bureau of Economic Analysis, and the US Bureau of Labor Statistics, an increase in the nowcast of third-quarter real gross private domestic investment growth from 5.2 percent to 8.1 percent was slightly offset by decreases in the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real government spending growth from 3.5 percent and 2.9 percent, respectively, to 3.2 percent and 2.7 percent, while the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth increased from 0.08 percentage points to 0.11 percentage points.”
This is largely about the huge increase in private sector investing that is being stimulated by yes, as I have been saying, our recent federal legislation that is creating a new industrial policy much like the Great Depression’s New Deal.
And why not? The COVID-19 pandemic did as much damage as the Great Depression when economies worldwide shut down. It took a New Deal then to bring us out of the Great Depression which lasted from 1933-38, and it is taking years to recover from the pandemic shutdown when 8 million jobs were lost, for starters.
Businesses ratcheted up fixed investment at a nearly 5 percent annual pace in Q2. That’s the biggest increase in six quarters. Investment rose at double-digit rates, in percentage terms, for both equipment and structures.
Part of the increase in domestic fixed investment likely stems from the Inflation Reduction Act that gives subsidies and tax credits to businesses that invest in green energy and technology such as chip making.
All of this news should confirm once and for all that no recession is imminent this year. Even if growth in Q3 and Q4 slowed, the overall year’s growth would still be positive., I also said recently.
The inflation rate is cooperating. The PCE price index increased just 2.6 percent, compared with an increase of 4.1 percent in Q1. Excluding food and energy prices, the PCE price index increased 3.8 percent, compared with an increase of 4.9 percent.
There is also a burst in labor productivity, as workers are working even harder while their wages keep rising.
Brian Bethune, a Boston College economics professor in a MarketWatch Op-ed wrote that the U.S. economy has demonstrated “amazing flexibility and resiliency since the pandemic recovery cycle began three years ago.’
Business productivity jumped by 3.7 percent while unit-labor costs rose just 1.6 percent.
“At the same time, overall prices increased by 2.2% — well within the U.S. Federal Reserve’s target and the lowest inflation rate since the second quarter of 2020,” said Professor Bethune.
Economists are also coming around to the view that targeted government spending is necessary for future economic growth. Dani Rodrik in an interesting Project Syndicate opinion piece summarized the research that is refuting so-called ‘free marketers’ views that any domestic industrial policy other than for the military harms economic growth and innovation.
“The results of this research are much more favorable to industrial policy, tending to find that such policies – or historical accidents that mimic their effects – have often led to large, seemingly beneficial long-term effects in the structure of economic activity.”
So why does the Fed want to continue to raise rates? Our biggest economic competitor, China, is now experiencing slowing growth and actual deflation for the first time in two years.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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