US economy fends off ‘dubious’ recession fears

On Thursday, revisions to first-quarter economic data showed the economy growing faster than initially expected despite higher-than-initially seen inflation.

In the labor market, revisions resulting in part from fraudulent data in Massachusetts show that unemployment insurance claims are not piling up as expected.

Together, the data points add to a growing narrative that current economic data does not match the pessimism of some economists warning of a recession.

The argument that we’re definitely going into a recession is dubious, Rick Rieder, fixed income IT director at Blackrocks, told Yahoo Finance Live. The question is whether inflation can come down enough to hit the target, and that’s the one that’s unclear at this point.

Rieders’ comments come amid a week that has shown consumer spending power not deteriorating at an aggressive rate. Best Buy (BBY) thinks its worst quarter is behind it as it forecast stronger consumer tech demand in the second half. Specialty clothing retailers Urban Outfitters (URBN) and Abercrombie & Fitch (ANF) reported strong sales. And even business-to-business spending doesn’t appear to be falling, as shares of Nvidia (NVDA) and Palo Alto Networks (PANW) rose on optimistic earnings forecasts.

The spending chart adds to what could be another quarter of growth, according to the Atlanta Fed, which forecasts second-quarter GDP growth of 2.9%.

A combination of stronger growth and stronger inflation in the first quarter makes it even more likely that the Fed will see further rate hikes needed to cool activity enough to bring inflation down to 2%, the report wrote. Citis team of economists in a note Thursday.

Federal Reserve Chairman Jerome Powell left his options open at his final press conference on May 3, signaling what economists later called a “hawkish pause.”

The Fed Chairman noted that further decisions will be made meeting by meeting and based on all of the incoming data.

The story continues

But that stance appears to be changing, at least from other federal officials. On Wednesday, Federal Reserve Governor Christopher Waller discussed whether the Fed could raise interest rates or skip this meeting, inferring that there may be more rate hikes to come.

“I don’t support stopping rate hikes unless we get clear evidence that inflation is heading towards [from] our 2% target,” Waller said.

Meanwhile, Federal Reserve Bank of Boston President Susan Collins struck a different tone Thursday.

While inflation is still too high, there are promising signs of moderation, Collins said in a speech at Community College of Rhode Island. I think we may be at, or close to, the point where monetary policy can put interest rate hikes on hold.”

FILE – Federal Reserve Chairman Jerome Powell speaks during a meeting in Washington, Friday, May 19, 2023. (AP Photo/Andrew Harnik, File)

Ahead of next week’s jobs report, the current totality of data has markets increasingly betting on another rate hike in June. On Thursday afternoon, markets priced nearly a 50% chance of a rally or a break in June, according to the Fed’s CME monitoring tool.

Markets had been almost 100% confident in a break on the day of the CPI report on May 10 which revealed inflation was cooling at its fastest pace in two years.

But a resilient labor market with unemployment at its lowest level since 1969 and consumer spending under inflationary pressure is causing economists to question what once looked like an easy path.

While we expect the Fed to leave rates steady at its June meeting, the minutes from this month’s FOMC meeting made it clear that a further easing in labor market conditions is needed to keep rate hikes permanently off the table, the Oxford team of economists wrote. THURSDAY.

Josh is a reporter for Yahoo Finance.

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