Commentary Directory

Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations

Jacob Hess
August 17, 2023

After a strong GDP report for Q2 there were a lot of expectations for some of the momentum in the US economy to fade. Despite Fed rate hikes, the economy has expanded at an annual rate of at least 2% over the last four quarters after the technical recession at the beginning of 2022. Personal consumption has also been strong since the end of the pandemic, growing by at least 1% in every quarter since the beginning of the pandemic. Surely these numbers couldn’t be maintained after more than 500 basis points of hiking? Early July economic data suggests that it is possible.


To start the week, retail sales topped expectations by a substantial margin coming in at 0.7% MoM compared to an 0.4% MoM consensus estimate. When excluding auto sales, the beat was even stronger at 1.0% MoM vs the same 0.4% MoM consensus estimate. Despite some weakness in sales of electronics and furniture (both down -1% MoM or more), non-durable and services spending more than made up the difference. Food & drinking services spending remains the leader on the consumption end, up 1.4% MoM and 11.9% YoY in July, which is representative of consumers maintaining strong demand for services throughout the year so far. That seems like it could be a trend that follows into Q3. Non-durable categories like food & beverage (0.8% MoM) and clothing (1.0% MoM) were right there with strong food services. Finally, we also strength in the nonstore retail sales category (1.9% MoM) which benefitted from Amazon’s Prime Day during the month.

A day later, the Federal Reserve released an update on industrial production which has been a notable segment of struggle for the economy so far in 2023. This is one sector that has actually seen weakness as a result of tighter financial conditions. Both the ISM and S&P Manufacturing PMIs have pointed to an industrial contraction in the last few months, and weak industrial production has followed. However, July results pointed to a slight turn around in the fragility. The headline index increased 1.0% MoM, the strongest increase since the first month of the year, which surged past the consensus forecast of a meager 0.3% MoM increase. The gain was boosted by final product manufacturing, specifically consumer goods up 1.4% MoM and business equipment up 1.0% MoM. Now this report is slightly less rosy than the retail sales data, both headline and manufacturing industrial production are down on a YoY basis (-0.2% MoM and -0.7% MoM), but the bright start to Q3 gives hope that a turn around is possible. This is especially true when considering that producer prices of goods have been negative for a few months now which is likely a huge relief for manufacturing firms.

From Atlanta Fed

The early resilient economic data for July has many forecasters questioning the call for a slowdown in the second half of 2023 and a potential recession at the turn of the new year and the start of 2023. The most famous nowcasting model, the Atlanta Fed GDPNow estimate, has Q3 2023 GDP growth projected at a hot 5.8%, more than double the rate of growth in the first two quarters. The duo of July reports mentioned above caused the model to adjust this forecast up 1.7 ppts from 4.1% at the start of the week with estimates of consumption growth and equipment investment rising with it. While this model is often discounted for its volatility, top forecasters elsewhere are increasing Q3 GDP estimates from near nothing at the beginning of the quarter to close to 2% in August. The general sentiment is unquestionable: the US economy is not fading away, and the resilience will continue into Q3.

From Econ Mornings