The massive increase in GDP last quarter — the economy grew by 4.9 percent on an annualized basis from July to September, double the growth over the previous quarter — was long predicted only by the Atlanta Fed. The consensus among other observers is that this surge, and the consumer spending driving it, cannot be sustained in the face of declining savings, shrinking inventories, and the Fed’s “higher for longer” monetary policy aimed fixedly but flexibly on bringing the inflation rate down to its two-percent goal.
Today’s personal consumption expenditures (PCE) data for September showed prices steadily progressing toward the Fed’s target, with core inflation down to 3.7 percent from a revised 3.8 percent in August — not likely to alter the outcome of next week’s rate-setting FOMC meeting. Despite the surprising strength in GDP growth, we expect another pause as the Fed weighs the move that we will cover next week. We look today at the FY24 implications with a new Speaker, Rep. Mike Johnson, new PCE and GDP data, and key economic, legislative and hearing activity on the Hill this week.
Good weekends, all…
House Elects Speaker: Approps Ahead as Nov. 17 Nears
On Wednesday, House Republicans united behind Representative Mike Johnson (R-LA), elected Speaker of the House by a final tally of 220–209. Following Representative Jim Jordan’s (R-OH) failure to win the speakership last week, the House Republican Conference went through a grueling nomination process that included House Majority Whip Tom Emmer’s (R-MN) nomination and subsequent withdrawal from consideration. Many see Speaker Johnson’s election as a product of the low profile he has kept during his short tenure in the House and a Republican Conference exhausted from infighting.
Johnson’s election raises concerns about the FY24 appropriations process as we approach the November 17 expiration of the current continuing resolution (CR) funding the government until then. In a recent statement, Speaker Johnson indicated support for a short-term spending bill that would fund the government until January 15 or April 15, giving more time for House Republicans to push their appropriations bills through. This move would trigger the across-the-board spending cuts agreed to in June’s Fiscal Responsibility Act and push off important budget decisions until later in the fiscal year. But, Speaker Johnson’s no vote on the current CR may signal that a new short-term spending bill would not be as clean as the one we are now operating under.
Speaker Johnson’s election may also complicate things on the supplemental front. In an interview on Thursday evening, Speaker Johnson confirmed his plan to split up Biden’s proposal for a foreign assistance supplemental package. Speaker Johnson plans to bring a stand-alone package of $14.5 billion for assistance to Israel to the floor. This sentiment echoes in the Senate where Senators Roger Marshall (R-KS), J.D. Vance (R-OH), Mike Lee (R-UT) and Ted Cruz (R-TX) have proposed The Israel Supplemental Appropriations Act of 2023, which includes $14.3 billion in stand-alone funding.
The House has returned to normal operations as it reconsiders appropriations bills that seek the same harmful and unrealistic cuts as before, while ignoring the budget agreement passed in May. These bills would be very unlikely to receive approval from the Senate or President Biden. Speaker Johnson has laid out an ambitious appropriations timeline:
- This week: Energy and Water (Passed on Thursday in a 210-199 vote)
- Next week: Legislative Branch, Interior and Environment, and THUD
- Week of November 6: FSGG and CJS
- Week of November 13: Labor/HHS and Ag.
Even if the House can adhere to this plan, Congress remains a long way from agreement.
Meanwhile, the Senate continued to work through a long list of amendments to its “minibus” this week. Although it has been a longer process than initially expected, it seems that they are likely to pass the package — which includes funding bills for MilCon-VA, Agriculture-FDA, and Transportation-HUD — early next week.
U.S. Economy Grows by 4.9 Percent in Third Quarter
The United States economy grew by a shocking 4.9 percent over the third quarter of 2023 according to the advance estimate provided by the Bureau of Economic Analysis yesterday — up from an increase of 2.1 percent during the second quarter of the year — the steepest quarterly increase since the fourth quarter of 2021.
The much higher-than-expected GDP growth was primarily driven by increases in consumer spending and inventory investment. The increase in consumer spending reflected increases in both goods and services. The increased spending on services derived mainly from cash outlays for housing and utilities, health care, financial services and insurance, and food services and accommodations. The rise in spending on goods was driven by spending on nondurable goods, mainly prescription drugs, and spending on recreational goods and vehicles. Imports, which contribute to a decrease in the figure, rose over the quarter.
The strong GDP growth is the latest indicator of the U.S. economy’s continued resilience in the face of historically high interest rates. The consumer spending that drove GDP growth in the third quarter is unlikely to sustain into next year, as prospects for GDP growth in 2024 remain uncertain.
Core PCE Cools Again in September
Core inflation continued to cool in September. The latest personal consumption expenditures (PCE) price index data released by the Bureau of Economic Analysis this morning shows that core PCE, which excludes more volatile food and energy prices, rose by 0.3 percent last month. Core PCE rose by 3.7 percent over the past 12 months, continuing the downward trend seen over the past months.
Meanwhile, headline PCE increased by 0.4 percent over the month, consistent with the 0.4 percent increase in August, while year-on-year PCE rose by 3.4 percent. Energy prices increased by 1.7 percent, while food prices rose by 0.3 percent over the month. One area that the Federal Reserve is likely paying attention to is service-sector prices, which rose by 0.5 percent in September, reflecting the largest month-on-month rise in service prices since January.
The new data is unlikely to push the Fed to raise interest rates following the Federal Open Market Committee (FOMC)’s next meeting on Tuesday and Wednesday, when the Committee is widely expected to vote to hold interest rates steady at the 5.25 to 5.5 range.
UAW and Ford Reach Tentative Resolution
On Wednesday night, the United Auto Workers (UAW) union and Ford Motor Company agreed to a tentative deal that will end the union’s nearly six-week strike against Ford, while workers at General Motors and Stellantis will remain on the picket line. The deal would provide:
- a 25 percent wage hike over the 4.5-year contract.
- an initial wage increase of 11 percent.
- the reinstatement of cost-of-living adjustments.
- 150 percent raises over for the lowest-paid temps.
- a route for employees to reach top pay in three years.
- the right for workers to strike over future plant closures.
The tentative deal now needs the approval of local UAW leaders, and if approved, it then must be ratified by a simple majority of Ford’s 57,000 union-represented workers. If ratified, the deal with Ford could serve as a template for agreements to end the UAW’s strikes against the other two members of the Big Three Detroit auto-makers, GM and Stellantis (the owner of Chrysler). Both companies released statements following Wednesday night’s announcement that they will continue to work with the UAW to secure agreements as soon as possible. UAW leadership met with both GM and Stellantis on Thursday to continue negotiations. In GM’s case, despite progress, points of contention allegedly include cost of living allowance, retiree benefits, and the process for converting temporary workers to full-time employees.
Bank Regulators Unveil CRA Revisions
On Tuesday, the Fed, the FDIC, and OCC jointly issued their draft final rule to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA). The draft rule outlines the most substantial reforms to CRA regulations since 1995.
The draft final rule would update CRA regulations to:
- evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems.
- provide additional clarity on which community development activities are eligible for CRA credit.
- tailor CRA evaluations and data collection to bank size and type.
Congress enacted the CRA in 1977 as part of a broader legislative effort to address redlining and a lack of access to credit in low- and moderate-income communities. Most requirements under the rule would become applicable starting January 1, 2026, while remaining requirements, including data reporting requirements, would come into effect on January 1, 2027.
Ways and Means Hearing on Redefinition of Poverty
On Tuesday, the House Ways and Means Committee Subcommittee on Work and Welfare held a hearing titled “Measuring Poverty: How the Biden Administration Plans to Redraw the Poverty Line and Rob Resources from Rural Communities.” This hearing discussed the proposal to replace the current poverty measure with the Supplemental Poverty Measure (SPM). This could increase government spending and is seen by some as a way for the President to circumvent Congress’s power of the purse.
Witnesses testified that the change in the way we define poverty would give too much consideration to factors like cost of living, shifting resources from rural communities to urban communities. Witnesses argued that rural communities, while cheaper to live in, lack many of the resources that urban areas have. Disparities in access to things like transportation and inexpensive shopping options will not be reflected if the SPM is made to be the country’s official measure of poverty.
Subcommittee Chair Representative Darin LaHood (R-IL) stated that changing the measure of poverty would have major implications for the budget. He cited estimates that this would lead to $124 billion in increased spending on Medicaid and SNAP alone over the next ten years. Additionally, many at the hearing expressed concern over the ability of President Biden to go around Congress and make a unilateral decision to increase spending.
Digital Assets Subcommittee Considers Regulating Fintech
The House Committee on Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing on Wednesday titled “Modernizing Financial Services Through Innovation and Competition.”
The hearing considered four draft bills that have yet to be introduced or sponsored by a specific Representative:
- Financial Services Innovation Act of 2023
- Earned Wage Access Consumer Protection Act
- Examining Consumer Choice in Digital Payments Act
- Fostering the Use of Technology to Uphold Regulatory Effectiveness in Supervision Act
One particularly concerning draft bill, the Earned Wage Access Consumer Protection Act draft, would exempt fintech cash advances from important disclosure requirements under the Truth in Lending Act (TILA). Companies providing earned wage access (EWA) products claim to allow consumers access to the pay that they’ve already earned before their next paycheck. As Mitria Spotser of the Center for Responsible Lending emphasized in her testimony, EWA products are actually short-term loans and pose many of the same issues, with the worst versions of these products resembling predatory payday loans.
Representative Al Green (D-TX) raised that EWA companies appear to be structuring payments to avoid disclosures that may be required under TILA. At a time when more transparency and oversight of the growing area is needed, this bill seeks to move regulation around EWA products in exactly the wrong direction. The four bills seem to further push for deregulation in the fintech space despite the objections of Democrats and organizations focused on consumer protection.
Senate Antitrust Subcommittee Explores Housing Markets
The Senate Judiciary Committee Subcommittee on Competition Policy, Antitrust, and Consumer Rights convened on Tuesday to discuss competition and consumer rights in the housing market as the cost of housing continues to rise throughout the country.
While legislative action to address many issues contributing to the affordable housing crisis fall under the jurisdiction of the Senate Committee on Banking, Housing, and Urban Affairs, competition in the housing sector is a key issue. Subcommittee Chair Senator Amy Klobuchar (D-MN) raised three major competition-related issues in her opening statement:
- The proliferation of junk fees in the rental market, making it increasingly challenging for renters to compare and contrast prices
- The rise in the use of algorithmic tools that raise housing prices
- The increased involvement of institutional investors, often backed by private equity funds, in the housing market
The Consumer Financial Protection Bureau (CFPB) recently took action to tackle junk fees in the housing market, but further federal action is needed to address competition in the overall sector.
Tuesday, October 31
- FOMC Meeting (Day 1)
Wednesday, November 1
- FOMC Meeting (Day 2)
Thursday, November 2
- House Financial Services Committee Subcommittee on Capital Markets Hearing: Examining the SEC’s Agenda: Unintended Consequences for U.S. Capital Markets and Investors
- House Financial Services Committee Subcommittee on Housing and Insurance: The Factors Influencing the High Cost of Insurance for Consumers
- Senate Committee on Banking, Housing, and Urban Affairs Hearing: Ensuring Financial Protection for Servicemembers, Veterans, and Their Families
Friday, November 3
- October Jobs Report
Other Related Articles
- Update 741 — Fed Holds Rates; CPI 3.1%: (When) Can Fed Pivot from Long Pause?
- Update 740 — A Supplemental Surprise: Political Timelines vs. Actual Emergencies
- Update 739 — SCOTUS Seems Moore Unsure: Re Congress’ Authority to Tax Certain Income
- Update 738 — Immaculate Disinflation: Felt or Not, Prices Nearer Fed’s Target
- Update 737 — Undersupply and Costs: Problems Besetting the Housing Market