UPDATE: Thursday, Oct 27, 2022 · 5:28:34 PM +00:00 · this is only a test
CNBC has a nice report “Treasury yields fall after GDP report shows some signs of inflation easing”. Here’s a quote:
“The GDP release this morning was a goldilocks number for risk assets,” said Cliff Hodge, chief investment officer for Cornerstone Wealth. “Top line growth was solid, though consumption decelerated, it was still positive, highlighting resiliency in the major driver of the US economy. GDP was also helped by a normalization of trade. The major bright spot however, was in prices. The GDP Price index slowed dramatically quarter over quarter and came in below expectations. This is another sign pointing to the likelihood that the worst of inflation may be behind us.”
This morning at 8:30am eastern time, the Bureau of Economic Analysis released its advance GDP report for the 3rd quarter: “real” (inflation adjusted) GDP grew by 2.6%. Despite the Fed raising short term interest rates like it’s 1979, there’s no recession yet.
The Fed’s preferred measure of inflation — the price index for Personal Consumption Expenditures (PCE) — fell from a 7.1% annual growth rate in the 2nd quarter to 4.1% in the 3rd quarter. The PCE price index without Food and Energy (another key measure) came in at 4.4%, down a little from the 2nd quarter. The key table in the GDP accounts is Table 2.3.4U, which shows the price index levels by quarter. You can really see the fluctuations in gas and food prices since the pandemic and the Russian invasion of Ukraine. Despite the slower inflation in the third quarter, you can see that we still have a problem with food, motor vehicle, and housing (rent) prices by how much those indexes have increased since 2020.
I predicted lower inflation in the 3rd quarter in a recent diary “U.S. Inflation Has Slowed a Lot in Recent Months.” My reasoning was simple: the monthly Consumer Price Index (CPI, a popular, but narrower inflation measure) has been much lower since June. That’s what the chart at the top of this diary shows.
The broader PCE measure shares many of the same measures as the CPI, and PCE is reported in a sensible quarter-to-quarter an annual rates metric, unlike the headline CPI, where the most common “headline” measure is the trailing 12 month rate.
While the press mostly looks at the 12-month growth in the CPI, which will be stuck at about 8 percent until the big increases in the first half of 2022 roll off the 12 month measure, the Fed prefers the broader, and more current quarterly PCE measures.
It will be interesting to watch longer term interest rates like yields on the 10-yr Treasury bond today. Those rates have fallen so far this week, as investors have started to realize the Fed may be tightening too much. The strong growth in GDP was expected (see GDPnow from the Atlanta Fed), but I won’t be surprised if Wall Street is surprised by the better-than-expected inflation numbers. But who knows! Predicting Wall Street is not something I’m very good at.
Summary — the business media will find a way to spin this GDP and PCE price report negatively I’m sure! But it looks to me like a great GDP report on first glance. Economic Growth is Up and Inflation is Down. I have to go to work for a few hours, but will be back to make corrections, add charts, and take questions for a little while later this morning (eastern U.S. time), and again this afternoon after 3pm or so to re-evaluate the GDP report and comment some more.