The U.S. economy is flexing unexpected muscles, with recent data hinting at a potential shift from the much-anticipated "soft landing" to something far more glittering.
Only two months ago concerns about a looming downturn dominated the narrative, but as a series of upside data surprises rolled in, including better-than-expected GDP revisions, the September jobs report, and retail sales figures, the focus has turned to the possibility of an economic reacceleration.
The Atlanta Fed's GDPNow model, updated on Oct. 21, 2024, projects a robust 3.4% growth for third-quarter GDP. This is a notable jump from the 2.6% forecast just a month ago, signaling that the economy has gained more momentum than economists anticipated just a few weeks earlier.
If the projection holds, this would mark the strongest economic performance since the third quarter of last year, when the economy expanded at a blistering 4.4%. Moreover, the 3.4% forecast also outpaces the long-term average growth rate of 3.1%
The upward revision was largely driven by stronger-than-expected consumer spending. The forecast for real personal consumption expenditures jumped from 3.1% to 3.6% over the past month.
With the official third-quarter GDP data set to be released on Oct. 30, all eyes are now on whether the U.S. economy will surprise to the upside once again.
Corporate Earnings Fuel Optimism
Adding fuel to the economy's reacceleration narrative is a strong corporate earnings season. According to Bank of America's Savita Subramanian, 72 companies in the S&P 500 - representing 21% of the index's earnings - reported results that beat consensus estimates by an average of 5%.
Financials led the way with an 8% earnings beat, while the rest of the S&P 500 posted a 2% improvement.
Notably,74% of the companies that reported quarterly results outperformed on earnings per share (EPS), 60% surpassed revenue expectations, and 51% beat on both. These figures are well above historical averages, further boosting sentiment that corporate America is in a stronger position than many anticipated.
On Monday, both the S&P 500, as tracked by the SPDR S&P 500 ETF Trust (NYSE: SPY), and the Dow Jones Industrial Average, as monitored through the SPDR Dow Jones Industrial Average ETF (NYSE: DIA), were trading at a hair's breadth away their respective all-time highs.
Recession Fears Fade, Reacceleration Concerns Emerge
Bank of America economist Stephen Juneau stated, "With the latest string of upside data surprises, including the GDP revisions, client concerns have shifted from recession to reacceleration."
This reflects the growing optimism that the feared economic slowdown may not materialize after all.
"The economy is resilient, though we're still cautious about minor headwinds that may prevent full-blown reacceleration," he said, adding that "We remain comfortable with our base case of a soft landing."
Fed Policy: Slower Rate Cuts on the Horizon?
The Federal Reserve's response to the latest economic data will be closely watched.
After a 50 basis point rate cut in September, investors are now pricing in a slower pace of cuts, with a 90% chance of just a 25 basis point reduction in November, as per CME FedWatch. The possibility of no cut at all is also on the table.
Atlanta Fed President Raphael Bostic hinted last week the Fed may consider avoiding the November rate cut altogether.
"I am totally comfortable with skipping a meeting if the data suggests that's appropriate," Bostic said.
On Monday, Dallas Fed President Lorie Logan echoed this cautious stance, advocating for a "gradual lowering" of rates if the economy stays on its current trajectory.
Ed Yardeni, president of Yardeni Research, cautioned further rate cuts by the Federal Reserve, in an economy that is already performing well, could lead to inflationary pressures both in prices and asset markets.
"The result could be rebounds in both price and asset inflation rates. The latter is certainly underway in the stock market."
Torsten Slok, chief economist at Apollo Management, also highlighted rising chances the Fed will leave interest rates unchanged in November as the economy gains steam.