The US economy grew more than initially anticipated in the first quarter, according to the Bureau of Economic Analysis.
The BEA’s third reading of gross domestic product showed the US economy grew by 2% in the first quarter, marking a sharp increase from the previous reading of 1.3%.
The revision still indicates a slowdown from the 3.2% and 2.9% growth in the third and fourth quarters of 2022, respectively. The GDP revision is just one of many economic indicators coming in better than economists projected.
New data also out Thursday showed the early stages of an upward trend in weekly jobless claims, which could indicate softening in the labor market, hasn’t materialized. With 239,000 claims in the week ending June 24, jobless claims hit their lowest levels since May.
On Tuesday, June consumer confidence data hit its highest level in 18 months as other data revealed durable goods orders grew in May, even as economists had been expecting a decline, and May new home sales surprised to the upside.
“The US economy is currently displaying genuine signs of resilience,” Gregory Daco, Chief Economist at EY said on Thursday. “This is leading many to rightly question whether the long-forecast recession is truly inevitable, or whether a soft landing of the economy – where inflation falls to a sustainable 2% pace without a recession – is possible.”
The strong data has forced economists to reconsider their projections for a recession and investors to adjust their expectations for the Federal Reserve. As of Thursday morning, futures tied to the Fed’s benchmark interest rate are projecting an 86.8% chance the Fed hikes interest rates at its July meeting, per the CME FedWatch Tool. That’s up more than 10 percentage points in the last week and 30 percentage points in the last month.
“The Fed is attempting to slow an economy with considerable momentum and recent data (including lower jobless claims released simultaneously with GDP revisions) suggest policy may not yet be sufficiently restrictive to do so,” Citi’s team of economists wrote in a note on Thursday. “Risks to consensus growth forecasts remain to the upside, which also creates upside risk for inflation outcomes.”
Meanwhile, Federal Reserve Chair Jay Powell has been signaling that interest rates could stay higher for longer in recent commentary. Last week, Powell doubled down on the Fed’s stance that more rate hikes will likely be needed in 2023. And as recently as Wednesday, Powell has noted inflation isn’t headed down as quickly as hoped.
“Inflation has moderated somewhat since the middle of last year,” Powell said in prepared remarks for a Thursday speech at the Bank of Spain. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
The next read on inflation will come on Friday with the Personal Consumption Expenditure index set for release. The print is expected to show “core” PCE — which strips out the costs of food and energy — rose 4.7% over the prior year in May, unchanged from April. The Fed targets 2% inflation, on average. Over the prior month, “core” PCE is expected to rise 0.4% in May.
