We expect a 2.4% pace of growth with modest downside risk to our forecast when gross domestic product for the second quarter is released on Thursday.
The two main swing factors are inventories, which should be quite strong and are likely to make overall top-line economic activity appear stronger than it is, while slower government spending will likely be a drag on top-line growth.
Given the dynamics around inventory, trade and government spending, we tend to focus more on real final private demand from the private sector, which should arrive near the long-term trend growth rate of 1.8%.
When the first-quarter data was published, we emphasized real final private demand excluding inventories, trade and government spending,-which increased by 2.6%-rather than the more volatile top-line number, as a better indicator of the real economy.
We expect that same metric will reflect the cooling in the real economy that we have observed in other real-time data over the past three months and should play into what we think will mark the start of rate cuts in September.
Elsewhere, we expect solid consumer spending near 2.5% and sustained private investment to be the primary drivers of overall economic growth in the quarter. The quarter-over-quarter personal consumption expenditures index, the Fed’s preferred measure of inflation, should arrive at 2.6%.
Inflation to remain flat
Our forecast implies a second straight month of no increase in the PCE index, with the year-ago measure showing a 2.4% increase.
In pursuit of transparency, our forecast taken out to three decimals implies risk of a negative print on the top-line month-over-month estimate. In addition, we expect core PCE, which excludes the more volatile food and energy components, to increase by 0.1% monthly and 2.4% from one year ago.
Any data that arrives near our forecast will add to talk that the Fed should cut its restrictive policy rate this month. While we do not expect that to happen, if the Fed were purely data dependent, it would lean toward relaxing its policy rate for an economy that is cooling with slower hiring and a 2.4% inflation rate.
Fed to signal a rate cut in September
The Federal Reserve will maintain its policy rate in a range between 5.25% and 5.5% when it meets on July 30 and 31. But we anticipate a change in the committee’s policy statement that will signal a rate cut is on the table for September.
In addition, the Fed is likely to note a shift in the balance of risks toward a weaker labor market, which will affirm what the market has now fully priced in: a September rate cut.
We think that the Fed is missing an opportunity to get out ahead of the curve on an economy that is cooling with an inflation rate that stands close to the Fed’s 2% target. Further disinflation is likely in the goods sector, service sector pricing is easing and slower inflation in owner-occupied housing is finally in view.
Read more of RSM’s economic insights on growth, inflation and the middle market.
If Fed officials were truly data dependent, they would not just be considering a rate cut; instead, they would be cutting rates in July. That will most likely not happen.
But Federal Reserve Chairman Jerome Powell’s news conference on July 31 will almost surely contain language that will point to a probable relaxation of a policy rate that is too restrictive for an economy that is cooling amid a real policy rate that is increasing.
