Consumption Strong in August; Income, Not so Much

The Bureau of Economic Analysis (BEA) reported that economic growth during the second quarter of the year was revised up to a quarter-over-quarter seasonally adjusted rate of 3.8% on the back of higher personal consumption in services and a stronger nonresidential investment profile, especially real investment in equipment, which has been booming due to the CHIPS and IRA acts, and now stronger investment in equipment and software related to AI.

Trade in goods was also much more supportive in August, as firms reversed the large increase in imports recorded in July in advance of the increase in tariffs in August, with the non-seasonally adjusted trade deficit in goods dropping from $117.1 billion in July to $84.2 billion in August as both exports and imports of goods declined by 1.3% and 7.0%, respectively compared to July.

Meanwhile, new orders of durable goods were stronger than expected in August as new orders of transportation equipment, mostly defense and nondefense aircraft new orders, reversed the decline from the previous months. However, even if we stripped out large transportation items from new orders, the headline number was stronger than expected and recorded its fifth consecutive month-on-month advance.

Although we are still expecting employment growth weakness to continue, the argument that economic growth was slowing down is less certain today than it was a week ago, which will continue to complicate the Fed’s decision-making process. Today, the argument by the dovish members of the Fed is less supported than before and while we do expect overall weaker economic growth during the last quarter of the year, growth so far continues to surprise to the upside, which is inconsistent with the market’s view of two more rate cuts before the end of the year, especially if inflation continues to move higher.

A partial DOGE reversal seems to be in the offing

Although it is very difficult to know what is actually happening, recent news reports are pointing to a process of reversal of federal workers’ layoffs happening across the agencies most affected by such cuts earlier in the year. Some of the workers who have remained on the payroll but have not worked for more than five months have received letters telling them to report back to work on September 29, just two days before the end of the government’s fiscal year.

This decision is not going to affect those workers who accepted early retirement through the “Fork in the Road” (or Deferred Resignation Program), which, according to several sources, has been estimated at approximately 75,000. Furthermore, nobody knows at this time how many of the other estimated 125,000 to 225,000 workers who are still on the payroll due to court injunctions are being brought back to work. This means that although we are going to see some negative numbers coming from government workers dropping out during the next several months, our previous expectation that at most 300,000 workers are going to start dropping out of the employment numbers during the next several quarters is probably down considerably, depending on how many are being recalled back to work.

Furthermore, the potential for a government shutdown as early as next week will add to this uncertainty if it comes to fruition. Thus, we will have to wait and see how this process evolves, but for now, it is better news for the labor market and for the performance of the economy.

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Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

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