The US economy defied expectations during the second quarter, according to Bureau of Economic Analysis data released Thursday morning. Gross domestic product (GDP), which measures all the goods and services produced in the economy, advanced 2.8% in Q2, after adjusting for seasonality and inflation. That was twice as fast as the first quarter’s 1.4% and meaningfully ahead of most economists’ estimates.¹

It’s important to recognize that about a third of the economy’s growth in the second quarter was due to what the Bureau of Economic Analysis (BEA) calls the “change in private inventories”, which represents output produced by the economy during the quarter that hasn’t yet been sold or otherwise put into use. For that reason, it will become increasingly important to watch middle-shelf economic indicators like the BEA’s business inventories release and inventory-to-sales ratios (which tend to peak about midway through recessions) as a way to triangulate future growth. If the economy really is in the process of stagnating as some suspect, we should see these ratios starting to climb in the very near future.

It’s also important to remember that last week’s GDP release was just BEA’s first estimate – it will be revised at the end of August and again at the end of September as more data become available. This tendency to revise is one of the reasons why markets rarely focus on GDP data. Another is that GDP data is, by its very nature, backward-looking, and what markets typically try to concern themselves with is anything that allows investors to look forward.

Given how difficult it is to aggregate something as complicated and vast as the joint profitability of the nation’s private enterprises, corporate profits are never included in the advanced GDP estimate, which will be released August 28th. In the meantime, we’re kind of left guessing how profits in general have been impacted by things like margin pressure and tepid demand as the current economic cycle matures.

Finally, here’s a little more on the consumer before we move on. In my view, the economic narrative rests on the shoulders of the consumer and the labor market right now. While consumer sentiment has bounced from the all-time low it hit last year, last week’s update from the University of Michigan confirmed that sentiment remains weak – especially for lower-income consumers.² And to underscore the point, consumer debt data released by the Philadelphia Federal Reserve last week showed that the percent of credit card balances that are more than 60 days past due reached above 2.5% during the first quarter of 2024, the first time it’s hit that level since the bank began collecting data in 2012.³

What to watch this week

It’s hard to imagine a busier week. Not only is it payrolls week (the Bureau of Labor Statistics’ big day arrives on Friday), but we also get a Fed decision on Wednesday and the most active earnings calendar so far this season.

Let’s start with the Fed. As expected, the Fed’s peer to the north made good on expectations for its second rate cut in a row last week when the Bank of Canada cut rates by a quarter-point.⁴ While that might theoretically give the Fed some cover to justify a cut of its own, I wouldn’t bet on it: Futures pricing data places the probability of a cut at around 5%.⁵

Chief among these data points that argue against a cut are last week’s above-mentioned stronger-than-expected GDP report, coupled with PCE inflation that came in roughly in line with expectations inside Friday’s income and outlays report. So, taking inventory, we have low market expectations, decent economic growth, and relatively tame inflation. That seems like a perfect environment for the Fed to remain on hold for at least a little while longer, meaning the biggest news will once again come from the post-decision press conference. Watch for any hint that a quarter-point cut in September – currently market consensus by a wide margin – may or may not be on the table.

As far as payrolls are concerned, it’s hard to over-state how important the health of the labor market is for the economic narrative right now. After emerging from the pandemic far too tight for anyone’s comfort, the labor market has eased considerably. Unemployment is back above 4%, weekly- and continuing unemployment claims are rising (though still not at recessionary levels by almost anyone’s definition), and cyclical employment appears to be stalling. Job openings are declining, too, as is the so-called “quits rate” – which acts as a litmus test for the confidence level of the average American wage earner. Those two datapoints will start the labor parade on Tuesday inside the aptly-named “JOLTS” report, followed by ADP’s estimate of payroll growth on Wednesday and Challenger’s layoff tally on Thursday. Each of these has the potential to move markets given the central role being played by labor markets in the current narrative.

Earnings season gathers momentum this week as well. Two of the world’s biggest companies – Microsoft and Apple – are due to report this week (Tuesday and Thursday, respectively), alongside Amazon (also Thursday), and a few more chipmakers (ON on Monday, AMD on Tuesday, and Intel on Thursday).

Under the “miscellaneous” category, we also get a handful of PMI-type data this week.

The same goes for housing: Trends are weak, and affordability is the main topic of conversation. On Tuesday, the Federal Home Finance Administration (FHFA) and S&PCoreLogic/Case Schiller present their latest update on home prices.