Yesterday brought news which rather changes the context of the US economy.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2026 is 6.2 percent on August 3, up from 5.0 percent on July 30. After this morning’s releases from the US Census Bureau and the Institute for Supply Management, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 3.3 percent and 15.9 percent, respectively, to 4.6 percent and 17.9 percent. (Atlanta Fed)
Should this turn out to be true then the US economy is growing at quite a rate. For example the quarterly growth of around 1.5% is likely to be more than the UK will grow this year. Plus it would mean it is presently growing faster than China. The investment number particularly catches the eye if we compare it to many of the struggles we see in Europe.
If we look into the breakdown around half of the recorded growth comes from consumption. Just under a sixth from investment and a third from a build up of inventories. So if we take an ex inventories number we would still have quarterly growth of 1%.
The number is very different to the “blue-chip consensus” of 2% annualised but the Atlanta Fed did a pretty good job last quarter.
The first estimate of second-quarter real GDP growth released by the US Bureau of Economic Analysis was 1.5 percent, same as the final GDPNow nowcast after rounding.
Running into the official release it has forecasts ranging between 1.3% and 1.7% so it was on the ball.
Is it AI?
There certainly seems to be a lot going on in this space.
A Financial Times investigation reveals how Google has built one of the largest infrastructure financing programmes ever assembled to support the rapid expansion of artificial intelligence, bringing together technology companies, private credit investors, investment banks and data centre developers in a web of transactions worth around $200 billion. The arrangements illustrate how AI investment is increasingly extending beyond traditional corporate spending into a complex financial ecosystem that could reshape both the technology industry and global capital markets.
Here is AI itself on er AI.
The artificial intelligence boom is driving a massive investment cycle that is propping up U.S. gross domestic product, though it risks squeezing out other activity and adding to inflationary pressures. As detailed in reports from the Wall Street Journal, this spending surge is transforming physical infrastructure, corporate debt, and business models.
My initial thought is that conventional surveys for GDP measurement are likely to have lots of problems measuring this new aspect of the economy.
Manufacturing PMI
This was not as upbeat but still showed economic growth.
The headline seasonally adjusted S&P Global US
Manufacturing Purchasing Managers’ Index™ (PMI®)
recorded 53.9 in July. The reading was unchanged from June and signaled a solid rate of expansion. Operating conditions have now improved consistently for a year.
Although looking ahead they had concerns.
“Although the headline PMI held steady in July, beneath
the survey we see some warning signs about the future
growth trajectory. Production rose at a markedly slower
rate in July, linked to a third month of weakened growth
of new business, in turn reflecting reduced inventory
building after the especially strong precautionary stock
accumulation reported in the second quarter.”
The Federal Reserve
It already feels like their meeting and press conference was ages ago but it was only last Wednesday and Chair Kevin Warsh did say this.
The most striking feature of the economy is the
strong growth of business investment. The surge in high-tech capex has been remarkable. But that does not necessarily make the Fed’s role any easier. In the A.I.-related category of high-tech equipment and software, the most recent data shows four-quarter growth rates of nearly 20 percent. This is helping to sustain the healthy momentum of manufacturing output. More generally, capex is preparing the ground for future growth.
In fact we got near to a central banking version of Tourettes.
and yes, the surge in A.I.-related investment.
Plus.
Third, we took up the related question of price increases arising from shocks. The business capex boom, for example, is driving up prices of memory and logic chips and associated A.I. infrastructure.
Indeed it also popped up later in a way that was awkward for Chair Warsh when this question was asked.
I’d like to follow-up on the task forces as well, and ask, what
vetting did you do of the people that you appointed to the task forces. In particular, given Marc Andreessen’s substantial political spending, $25 million in just the past year to back candidates who oppose stricter AI regulation, how can the public be confident that a committee he co-chairs will provide an independent assessment of AI’s economic effects, rather than one aligned with
the interests of the AI industry?
Heating up
There are other examples of the US economy running at full speed.
Investors pursuing “buy the dip” strategies, or merely rotating portfolios across sectors, seem unwilling to raise cash. Stock markets remain close to record highs after a 50% gain in major U.S. equity indexes over the past two years, and another 10% in the first half of this year. That’s buoying asset wealth for the richer cohorts of the population who account for the bulk of the consumption that drives the economy, encouraging greater spending out of disposable income and allowing companies to pad out margins in a circular flow. (Reuters)
That theme is rather hard to ignore as I type this as we have seen the futures contract on the S&P 500 reach a new all-time high of 7650 earlier.
Profit growth is strong.
estimated annual profit growth accelerated to nearly 50% for S&P 500 firms through the latest quarter;
Plus whilst the Covid era did weaken my faith in the GDP Deflator as an inflation measure it looks like something is going on.
nominal U.S. GDP clocked an annualised growth rate of almost 8% in the second quarter.
Although the outsized 6.3% rise in the GDP deflator — which accounts for overall inflation in the report — was largely energy-related, demand components were strong. This nominal GDP growth rate has only been topped twice over the past three years and is almost twice the 25-year average. Consumer spending surged 3.2%, while business investment in equipment raced ahead at a 15% pace. (Reuters)
Comment
The simplest review of this is that the Federal Reserve really went out its way to not raise interest-rates last week. It was described by Nelly
It’s gettin’ hot in here (So hot)
So take off all your clothes (Ayy)
{I am gettin’ so hot} (Uh, uh, uh, uh)
{I wanna take my clothes off} (Oh)
It’s gettin’ hot in here (So hot)
So take off all your clothes (Ayy)
So we have yet another case of ignore my actions and instead listen to my words.
I think there was a misimpression by some in financial markets, by some households and businesses,
that central bankers like me, we set a 2 percent inflation target, but maybe we were more tolerable of a somewhat higher inflation target. In economics we’d call that the “revealed preference”. And so might it have been rational for people to think, well, their inflation target is
somewhat higher.
Putting it another way central bankers are politicians these days and they usually now to get the bad news in early. But today we have seen lots of indicators which in past times would have seen interest-rates go higher. The irony is that he is now trapped in a battle with bond yields that is partly of his own creation.