It’s the economy, stupid

When the economy feels hard to navigate, we return to our macro anchors—acronyms, acronyms, and more acronyms. Today, we got a slew of data points implying a mixed-bag for the economy: hings aren’t imploding, but they’re not going great, either.

First up: GDP. The US economy grew at a 1.5% annualized rate in Q2, slightly slower than the 1.8% that economists were expecting, and lower than the first quarter’s 2.1% growth. But exports increased 0.5% and imports fell 1.5%, slowing down the headline reading. If you look under the hood, most facets of the economy are still A-okay: Personal spending jumped 2.1%, higher than the 0.4% it rose in Q1.

In other news, shoppers are keeping calm and shopping on, despite rising prices: Consumer spending came in better than expected, jumping 3.2% from a year ago, up from the 0.5% it increased in Q1. But maybe consumers are feeling a little too spendy: The personal savings rate declined 2.7%, to its lowest level in four years.

Meanwhile, our old friend inflation arrived roughly in line with expectations, but still far above the Fed’s 2% inflation target: PCE fell 0.1% between May and June; the first time the metric has dropped since the pandemic. But Core PCE (the Fed’s preferred inflation gauge) jumped 0.1% in June and 3.3% since a year ago. Falling crude prices played a key role: Energy goods and services prices dropped 5.9% in June, as gas prices dropped 9.2% when tensions eased in the Middle East last month.

What lies ahead

“These data confirm what we already knew—but for the energy shock, inflation would be heading lower,” wrote Harris Financial Group Managing Partner Jamie Cox. “The Fed made the right call yesterday to stand pat on rates.”

But the central bank’s central problem of lowering inflation hasn’t been solved yet. Fighting in the Middle East is flaring up once again, promising to push oil prices (and inflation) higher, while Kevin Warsh’s coy responses at yesterday’s post-FOMC press conference means investors don’t have much insight into the Fed’s next move ahead of its meeting in September.

In other words, the market has a new favorite acronym: KWW (Keep Watching Warsh).—LB