While the Federal Reserve is set to announce its first rate cut in the current monetary policy cycle, some have expressed concerns about the move being too little too late to prevent a recession. However, market strategist and President of Yardeni Research, Ed Yardeni, has allayed these fears.
The Atlanta Federal Reserve’s GDPNow model recently revised its estimate for third-quarter real GDP growth upward from 2.5% to 3%, indicating a healthy national economy. This revision was made after strong August retail sales and industrial production reports were released. The Commerce Department reported a 0.1% month-over-month increase in retail sales in August, defying expectations of a 0.2% drop. While auto sales slipped slightly, core retail sales (excluding motor vehicles and gas stations) saw a moderate 0.2% increase. Furthermore, the Federal Reserve reported a 0.8% month-over-month rise in industrial production for August, exceeding the consensus forecast of 0.2%.
Yardeni highlighted that the upward adjustment to the GDPNow model was primarily driven by an increase in real consumer spending growth from 3.5% to a robust 3.7%. Additionally, the increase in real spending on capital equipment was revised upwards from 10.8% to 11.6%.
The strong economic data released in August, including the positive non-farm payroll gains, suggests that the index of coincident economic indicators may have reached another record high. This index, calculated by the Conference Board, considers key economic factors like payroll employment, personal income, manufacturing and trade sales, and industrial production. Yardeni notes that the year-over-year growth rates of this index and real GDP are highly correlated, indicating a positive trajectory for both.
These positive economic indicators could make the upcoming Fed rate cut more beneficial for the market. Many strategists believe that rate cuts are more effective when the economy is already robust and not on the verge of recession. The SPDR S&P 500 ETF Trust (SPY), a widely-tracked exchange-traded fund mirroring the S&P 500 Index, rose 0.14% to $563.84 in response to the positive economic news.
With the economy showing strength, the Fed’s rate cut might be a timely intervention to further boost economic growth and maintain market stability.
