The US posted another impressive GDP report today, though slightly less than expected. Growth of 2.8% fell short of the 3.0% consensus but the details in this report were impressive, with consumer spending offsetting a drag from net trade.
The important takeaway from CIBC is that the economy isn't overheating - they say "3% is the new 2%," suggesting the economy's potential growth rate has improved on better productivity. They point to cooling inflation and labor markets despite strong growth for the past two years as evidence.
The bank notes that wealthy millennials are helping drive consumption, with their net worth more than doubling since late 2019. Equipment investment was strong across the board, likely helped by lower long-term rates.
"Even with the labor market continuing to cool, consumption growth may not necessarily tail off dramatically. The role of asset income and spend-happy Millennials are a structural tailwind to consumer spending," CIBC writes, noting that could be offset by a crackdown on immigration and on net that should lead to slightly slower consumption.
The bottom line here is that GDP growth is very healthy and economy is operating not far from its newly expanded capacity. The Fed's attention will still be on the labor market and we expect some gap between GDP and the jobs market to continue opening up. The strong improvement in productivity mean firms don't need to expand their workforces as much, and output can grow at a healthy pace with the help of past investments in technologies that continue to pay-off. That dynamic will continue to boost consumption indirectly through the optimism in the equity market. It's a complicated and messy, but overall very nice problem to have for the Fed. While the diagnosis of the economy has changed with upward surprises and revisions, the recipe for the Fed is the about the same. Gradual rate reductions are expected to keep the music going while trying to figure out where the neutral rate really is
