US Economy Posts Red-Hot Growth

US Economy Posts Red-Hot Growth

Republicans will give their new speaker a honeymoon period.
By Yuval Rosenberg and Michael Rainey
Thursday, October 26, 2023

Happy Thursday! The House is back in business under newly installed Speaker Mike Johnson, and Republicans today passed an energy-and-water spending bill that proposes steep spending cuts. Here’s what you should know while waiting for the World Series to start.

House Republicans Get Back to Business With Climate Cuts

The House on Thursday passed a partisan Republican energy spending plan, the first government funding bill approved in the chamber under newly elected Speaker Mike Johnson.

The “Energy and Water Development and Related Agencies Appropriations Act” passed almost entirely along party lines in a 210-199 vote. It would slash renewable energy and climate-friendly programs passed as part of last year’s Inflation Reduction Act.

“The bill cuts more than $5 billion in spending that was passed as part of Democrats’ signature climate, tax and health care bill — which was approved without GOP support last year,” The Hill reports. “The legislation is unlikely to become law, as the White House has threatened to veto it, but it represents the House Republican position on energy- and water-related issues as they negotiate 2024 funding with the Democrat-led Senate and the White House.”

With Johnson in as speaker, ending weeks of drama after the ouster of former speaker Kevin McCarthy, Republicans will look to complete the seven remaining annual appropriations bills ahead of eventual talks with Senate Democrats. (The House had already passed four of the 12 annual appropriations bills prior to this month.)

Johnson has outlined a plan seeking to quickly pass the funding bills but also enact a stopgap measure to prevent a shutdown if one is needed ahead of a November 17 deadline, when current funding expires.

Johnson is reportedly set to enjoy a bit of a honeymoon period on those funding bills, as hardliners are less likely to make the same demands as they did with McCarthy.

“Several hardliners said they're open to another short-term funding patch, albeit with conservative priorities attached, that would prevent a shutdown next month,” Politico’s Sarah Ferris, Caitlin Emma and Jennifer Scholtes write. “Some of those Republicans are even suddenly willing to disregard one of their biggest demands of McCarthy during the former speaker's tenure — cutting $115 billion from the GOP's existing spending topline.”

And Sahil Kapur of NBC News suggests that the new speaker — and his temporarily tranquil hardliners — should be able to avoid a shutdown next month: “Many House Republicans are likely to vote against a continuing resolution, but as long as they don’t retaliate against Johnson for leaning on some Democratic votes to pass it, Congress will be in good shape to avert a shutdown on Nov. 17.”

US Economy Roars in the Third Quarter

The U.S. economy surged in the third quarter, as gross domestic product grew at a 4.9% annualized basis, according to an initial estimate released by the Commerce Department Thursday.

The strongest quarterly growth since late 2021 was driven by consumer spending on both goods and services, inventory restocking and government spending at the state, local and federal levels.

Consumers, boosted by slowing inflation and rising wages, played a central role in the exceptionally strong results as they continued to defy expectations of a slowdown. Diane Swonk, chief economist at KPMG, said the numbers indicate that consumers and businesses are in better financial shape than many analysts thought. “Households and firms used the stimulus provided during the first two years of the pandemic to further shore up their balance sheets. They locked into ultralow rates when they could, paid down existing debt and banked the excess savings they amassed during initial lockdowns,” she wrote Thursday. “Recent revisions revealed that households alone still had $1.4 trillion in excess savings as of August, nearly double previous estimates.”

Defense spending also played an important role in the strong growth, as the U.S. military restocked some of the weapons and ammunition that have been sent to Ukraine. Defense expenditures rose by 4.9% on an annual, inflation-adjusted basis, the fastest pace since 2019.

The report included good news on inflation, as well. The personal consumption expenditures (PCE) price index increased 2.9% in the third quarter, while the core PCE index — which leaves out volatile fuel and food prices — increased 2.4%. “Inflation is now officially *two-point-something-percent*, which puts us within spitting distance of the Fed’s target,” said University of Michigan economist Justin Wolfers.

A win for ‘Bidenomics’: The White House hailed the report as a validation of the president’s economic policies. “I never believed we would need a recession to bring inflation down – and today we saw again that the American economy continues to grow even as inflation has come down,” President Joe Biden said in a statement. “It is a testament to the resilience of American consumers and American workers, supported by Bidenomics—my plan to grow the economy by growing the middle class.”

Biden noted that the unemployment rate has been below 4% for 20 consecutive months, and that household wealth has surged to record highs. “I hope Republicans in Congress will join me in working to build on this progress, rather than putting our economy at risk with reckless threats of a shutdown or proposals to cut taxes for the wealthy and large corporations, while slashing programs that are essential for hard-working families and seniors,” he added.

Treasury Secretary Janet Yellen also celebrated the report, saying it points to a solid economy with inflation on the decline and no signs of a recession. She took the opportunity to tweak critics and forecasters who said the Biden administration couldn’t slow inflation while maintaining growth. “Frankly, it’s only, it’s about a year ago since I believe a Bloomberg model predicted that by October of 2023 – now, namely – that you saw the odds of recession at 100%. I don’t think we have that. You know, what we have looks like a soft landing with very good outcomes for the U.S. economy.”

Slowdown ahead? Expectations for GDP are much lower for the fourth quarter, and few analysts are predicting growth at anywhere near the third quarter’s level, while some still see a recession looming. The investment in inventories will likely slow if not reverse, the resumption of student loan payments will weigh on millions of households, and surging interest rates could hamper car and house purchases. “We can already see the drag forming in the final three months of the year,” Joseph Brusuelas, chief economist at the consulting firm RSM, said.

Michael Arone, chief investment strategist for U.S. SPDR Business at State Street Global Advisors, told CNBC that the consumer “shopping spree” in the third quarter was probably over. “Going forward, the consumer’s not going to spend at the same rate, the government is not going to spend at the same rate, and businesses seem to be slowing down their spending as well,” he said. “This suggests this might be the peak GDP figure, at least in the next few quarters.”

A jolt for the Fed? The mix of strong growth and weak expectations makes it hard to predict how the Federal Reserve will react to today’s GDP report. “The resilience of the economy is both a blessing and a curse for the Federal Reserve,” Swonk said. “It ups the odds of the once elusive soft landing, while raising the risk of reigniting the cooling embers of inflation.”

Still, most analysts think the results will not push the Fed to raise interest rates again, with Swonk saying she expects to see another “hawkish hold” when the Federal Open Market Committee concludes its next meeting on November 1. Arone echoed that view, saying “I don’t think anything in this report changes the outlook for monetary policy.”

Number of the Day: 17 Million

Some 17 million U.S. households struggled at some point in 2022 to provide enough food for all their members, according to a report released Wednesday by the Department of Agriculture. That means that 12.8% of households — or more than 44 million people — were food insecure, up from 10.2% (13.5 million households) in 2021. “The new figures, from the agency’s Economic Research Service, show an end to a nearly decade-long decrease in the number of families reporting food insecurity, at a time when food prices remain elevated because of inflation,” The Washington Post’s Laura Reiley reports.

Agriculture Secretary Tom Vilsack sought to highlight the implication of the new data. “These numbers are more than statistics,” he said in a statement. “They paint a picture of just how many Americans faced the heartbreaking challenge last year of struggling to meet a basic need for themselves and their children, and the survey responses should be a wake-up call to those wanting to further roll back our anti-poverty and anti-hunger programs.”

Reiley adds that a government shutdown in November “would put more than 6.7 million women, young children and infants who rely on Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) services at risk.”

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