U.S. Economic Growth Update

The Growth Scare Is Over

This is not to say that GDP will not continue to slow down or that the deterioration in the labor market, judging by the U3 rate, will be arrested.  In fact, these two metrics may get worse, as economic momentum (positive or negative) is a real thing. 

GDP for Q3 is at its lowest nowcasted point this quarter thus far.

The labor market is at its softest since the post covid economic rebound. 

Some of this is a feature, not a bug, consistent with the Fed’s attempts at cooling the economy.

What should be inferred from the “growth scare” being over subtitle of this note is that the scare part should be minimized when looking at the U.S. macroeconomic backdrop.

In rationalizing the Fed’s policy pivot, Jerome Powell provided market participants with policy clarity by clearly articulating the Fed’s reaction function with respect to the evolution of incoming economic data. 

• “The upside risks to inflation have diminished”.

• “The downside risks to employment have increased”.

• “We will do everything we can to support a strong labor market as we make further progress towards price stability.”

-Jerome Powell, Jackson Hole 2024

These three sentences encapsulate the recent Fed pivot.  The first two refocus the Fed’s strategic goal.  The last sentence establishes the Fed’s commitment.  This summer’s strategic ambiguity over the dual mandate got shot in the head and “the direction of travel is clear” (Powell).

What this means is that the Fed’s is no longer institutionally wedded to a path or pace of rate cuts, and instead has a “whatever it takes” mindset to getting the job done.

• This policy clarity will lower interest rate volatility in the bond market, which will support risk assets. 

• Any additional economic weakness will be looked through, as firm expectations of policy support will allow investors to assume that the business cycle will remain intact.

• This is not dissimilar to how an equity share can rally despite near term earnings shortfalls as long as the outlook remains positive. 

• In other words, the Fed Put has been repriced at a higher strike price.

This is the policy environment we are now in.