Fed may double its economic growth forecast after strong US data

The US economy has been looking so solid lately that Federal Reserve officials will probably need to double their projection for growth in 2023 when they publish an updated outlook later this month.

Following a string of stronger-than-expected reports on everything from consumer spending to residential investment, economists have been boosting their forecasts for gross domestic product. One widely-followed, unofficial estimate produced by the Atlanta Fed even has it expanding 5.6 per cent on an annualised basis in the third quarter.

That marks a sharp turnaround from three months ago - the last time policymakers updated their own numbers - when the consensus view was that the economy would stall in the current quarter. And it may be enough to prompt Fed officials to scale back their estimates for interest-rate cuts in 2024.

“Consumer spending was robust in June and July, so the third quarter is virtually baked in the cake at this point,” said Stephen Stanley, the chief economist at Santander Capital Markets US who is projecting 3.7 per cent growth in the July-to-September period. “5 per cent seems too high, but not impossible.”

Any read on GDP growth above 3.2 per cent would mark the strongest quarter since 2021, when the US was experiencing a rapid recovery from the initial shock of the pandemic. The acceleration is in stark contrast with the outlook for China, which has been downgraded in recent weeks amid a mounting property crisis.

When Fed officials last updated their own projections for the US in mid-June, they showed the median policymaker thought GDP would expand just 1 per cent in 2023. At the time, that marked an upgrade over the previous projection round in March, which implied a recession this year.

That number will probably go up to 1.8 per cent or 2 per cent in the new projections set to be released at the conclusion of the central bank’s September 19-20 policy meeting, and the outlook for the unemployment rate could be revised lower, according to Omair Sharif, president of Inflation Insights LLC.

The growth upgrade may also lead Fed officials to scale back the easing they had projected for next year to 75 basis points of rate cuts instead of 100, Sharif said.

Widespread upswing

The Atlanta Fed tracker - which is separate from policymakers’ quarterly projections - is volatile and will probably be revised down some before the government publishes its first official read on current-quarter growth at the end of October.

But it underscores the widespread upswing in sentiment over the past few months. Better-than-expected numbers in a monthly Institute for Supply Management report on the US services sector published Wednesday bolstered the theme.

Despite the rising optimism, the central bank has signalled it will probably leave its benchmark interest rate unchanged at the September meeting.

A rate hike in July brought it into a range of 5.25 per cent to 5.5 per cent - the highest level in 22 years - and Fed Governor Christopher Waller said on Tuesday that policymakers can now afford to “proceed carefully” given recent data showing inflation continues to ease. On Wednesday, Boston Fed President Susan Collins cautioned further tightening could yet be warranted.

“The economy accelerated over the summer, but the Fed is willing to wait out September,” said Diane Swonk, the chief economist at KPMG LLP in Chicago. “A soft or ‘softish’ landing is now the most likely scenario.”

Even if the odds of a recession have come down, forecasters are largely sticking to predictions that growth will slow in the fourth quarter. Looming headwinds include rising gasoline prices, a resumption of student-loan payments and the possibility of a government shutdown.