While many are concerned that the economy is heading toward a recession, new data on spending and the labor market suggest otherwise. It’s hard to bet against the American economy when the most recent data has surprised to the upside.
Significant revisions to income and gross domestic product from 2020 through last year released by the Bureau of Economic Analysis on Thursday, combined with strong new data on durable goods and jobless claims, help explain why market watchers, including us, underestimated the continuing robust economic rebound.
Read more of RSM’s insights on the economy and the middle market.
Last year, growth was revised up to 2.9% from 2.5%, while the economy added a total of $294.2 billion more in activity for the five years through last year. More important, inflation-adjusted gross domestic income last year was changed to a 1.7% increase from 0.4%, a significant boost to households’ balance sheet.
Given the stronger-than-expected data, we have updated our GDP forecast for the third quarter to a 2.8% gain from 2.5%, with the chance that it will go higher. We wouldn’t be surprised to see GDP increase by 3.0% this quarter.
Concerns over weakening growth, stemming from sharp drops in July’s jobs data, now appear overblown as other key indicators like retail sales have since pointed to stronger growth. Weather-related and seasonal fluctuations within the data are one reason why we believe caution is needed when interpreting one bad data point.
Jobless claims
Last week’s initial jobless claims data is another reason why we should not overreact to the spike in early summer, which we attribute to policy changes around school jobs, weather issues, and the residual impact of the pandemic years.
New claims fell in August and September, returning to the pre-pandemic average of 218,000, similar to last year. As an important proxy for layoffs, the initial claims data for last week reaffirms our forecast that September’s unemployment rate should remain at 4.2%, even when there is a slowdown in job gains.
Capital goods
In a separate report on Thursday, after a tough July for core business spending, August had a solid rebound in both shipments and orders of key capital goods—excluding defense and aircraft—which should significantly contribute to GDP growth in the third quarter. Shipments of core capital goods increased by 0.1% on the month, while orders of the same goods rose by 0.2%.
Orders rose for most categories except transportation, driven mostly by the drop in aircraft orders. Orders for vehicles and parts, however, increased by 0.2% on the month.
The latest economic data and revisions reinforce the strength of the U.S. economy, countering recession concerns. With robust spending, job market resilience, and rising capital goods orders, growth remains on track to surpass expectations for the third quarter.
