Gabriela Santos on the OK Economy: Fed Policy, GDP, and Consumer Spending

Federal Reserve Policy and Economic Outlook

• 💡 Governor Waller and other Fed members are emphasizing a normalization of rates, not policy accommodation, with futures markets now better priced for this shift.
• 🎯 The market is pricing in approximately 100 basis points of rate cuts over the next year, aiming for a neutral rate of about 3%.

GDP Growth and Economic Noise

• 📊 The GDP report is expected to be a key indicator, with the second quarter showing over 3% growth, but momentum is not accelerating significantly.
• ⚠️ A potentially weak fourth-quarter GDP report is anticipated, not signaling a recession, but indicating an okay economy rather than a red-hot one.
• 🧩 The first half of the year showed significant noise in GDP data due to exports and inventory fluctuations.

Consumer Spending Trends

• 📉 High-frequency data suggests a slowdown in consumer spending in October, particularly in discretionary categories.
• 🛍️ Consumer spending patterns are shifting, with a rebound in services spending (like restaurants) after initial weakness in core goods.
• ⚠️ Retailers are facing pressure, and their ability to maintain margins by passing on costs or cutting expenses will be crucial in Q3 and Q4.

Labor Market and Government Shutdown

• 🚫 Equity markets are largely looking past the government shutdown noise, focusing on secular trends like AI and upcoming earnings.
• ☁️ The shutdown creates a data fog, potentially delaying economic data releases like CPI, which could impact Fed decisions.
• 📉 A cooling in private sector hiring is a warning sign, with some economists suggesting payrolls may have been negative in recent months.
• 🤖 The AI trade is a significant driver in the market, expected to continue with double-digit earnings growth for the fourth consecutive quarter.