US Economy Projects Strong Growth Amid Weaker Inflation Pressures
New economic data suggests that the US economy is on track to grow at what analysts describe as an “encouragingly solid pace.” According to recent commentary by economist Chris Williamson, sales-driven momentum is being bolstered by “competitive pricing,” leading to lower inflation rates. The selling price inflation for goods and services has dipped to its lowest level since May 2020, aligning with the Federal Reserve’s objectives of maintaining inflation near its 2% target.
Positive Growth Projections
This upbeat economic outlook coincides with strong forecasts for gross domestic product (GDP) growth in the third quarter. Following a robust jobs report for September and several better-than-expected retail sales figures, the economics team at Goldman Sachs has projected that the US economy grew at an annualized rate of 3.1% in the third quarter. Meanwhile, the Atlanta Fed’s GDPNow model offers an even more optimistic outlook, estimating an annualized growth rate of 3.4% for the same period.
Recession Fears Easing
The higher-than-expected growth projections have served to assuage recession concerns that had emerged earlier in August. The unemployment rate unexpectedly rose to 4.3%, igniting fears based on a widely-followed recession indicator. However, insights from Oxford Economics have indicated that the probability of recession models showed significant improvement in September, reversing much of the previous uptick. Senior US economist Matthew Martin noted that this positive turnaround has strengthened their conviction regarding an above-consensus GDP growth forecast for 2025.
Market Response and Federal Reserve’s Interest Rates
Despite favorable economic data, the outlook has not significantly swayed market expectations regarding the Federal Reserve’s actions in November. Currently, traders are pricing in a remarkable 95% chance that the central bank will implement a 25 basis point interest rate cut at its next meeting, according to the CME FedWatch Tool. However, there has been a notable shift in market sentiment regarding future rate cuts, with traders now anticipating one fewer cut than previously expected as of October 4. Comparatively, that figure is down by two cuts from preliminary projections made on September 18, just days before the Fed’s decision to cut rates by half a percentage point.
Treasury Yields and Stock Market Implications
Accompanying these changing expectations is an uptick in the 10-year Treasury yield, which has risen by nearly 50 basis points over the past month to hover around 4.2%. While higher yields can present challenges for equities, some analysts contend that if this increase occurs alongside solid economic growth, it could have a positive impact on stocks.
Gargi Chaudhuri, BlackRock Americas’ chief investment and portfolio strategist, suggests that a gradual rise in yields, when driven by expectations of economic growth, has historically been beneficial for companies’ earnings. “A gradual move higher [in yields]… for the right reasons, with the expectation of higher growth, historically has tended to be good for those earnings growers,” Chaudhuri noted in a discussion with Yahoo Finance. She emphasized the importance of maintaining quality investments at the core of investment portfolios to navigate these conditions successfully.
Conclusion
In summary, the latest economic data presents a positive outlook for the US economy, suggesting growth at a robust pace while keeping inflation pressures subdued. With significant forecasts for the third quarter GDP and easing recession fears, market participants are cautiously optimistic. However, the dynamics surrounding Federal Reserve interest rate changes and Treasury yields continue to be a focal point for investors as they either see opportunities or potential challenges on the horizon.