Economy lining up just right for a rate cut

Economic data last week showed an economy continuing to hum along, with consumer confidence rising, weekly jobless claims slightly lower and inflation data trending lower. 

The Conference Board Consumer sentiment index rose in August on more upbeat view of the economy and inflation, partly offset by falling confidence in the labor market expectations. Consumer expectations for the next six months rose to a 1-year high, and a gauge of present conditions edged higher. But consumers reported they were less likely to buy big-ticket items, such as cars, homes and major appliances. The survey was completed before Federal Reserve Chair Powell indicated that rate cuts were in the offing, so this may help consumer views. 

The final August University of Michigan consumer sentiment survey echoed these findings, as consumers’ short- and long-term economic outlook improved. Their year-ahead inflation expectations fell from 2.9% to 2.8%, while longer-run expectations were unchanged at 3.0%. Likewise, the government’s measures of prices are stable, which should give the Fed further confidence that inflation is well-behaved.

Weekly jobless claims fell by 2,000, to 231,000, and the 4-week average (which removes some of the week-to-week volatility) also fell, to 231,500. There is little indication of labor market weakness. 

Second quarter gross domestic product was revised slightly higher, from 2.8% to 3.0%, as personal consumption was revised from 2.3% to 2.9%.

What does all this mean? Inflation continues to trend toward the Fed’s 2% target, and the labor market continues to hang in, even though the unemployment rate has increased. Economic data would seem to support the Fed’s decision to begin lowering its fed funds rate gradually.