Update 799: GDP Surges 2.8% in 2d Qtr.

September 24, 2024 | Update, Weekly Round Up | By

Update 799 — GDP Surges 2.8% in 2d Qtr.,
PCE Eases Again, Leading Weekly Roundup

The American economy grew by an unexpectedly strong 2.8 percent last quarter — double the growth rate of the prior quarter— and prices continued to come down last month, with inflation falling to 2.5 percent in June, according to new macroeconomic data released this week. The latter is good news for the Fed’s interest-rate-setting committee ahead of its meeting next week, but likely not good enough to prompt an immediate rate cut still in view for September. All of this occurs against the backdrop of the new electoral landscape, with Kamala Harris narrowing Donald Trump’s lead in the polls. 

In other news, the House is entering its August recess early after the GOP failed to advance three of four appropriations bills. Also this week, the House held hearings on a handful of thorny issues, including housing, AI, and Congress’s response to the overturning of Chevron. We dig deeper into these economic policy developments, and others, below.

Good weekends, all…

Best,

Dana

Headline

Strong Growth, Inflation Ahead of FOMC Mtg. Next Week

  • U.S. GDP Jumps 2.8 Percent in Second Quarter

The United States economy grew by 2.8 percent on an annualized basis in the second quarter of 2024, far exceeding expectations of 2.0 percent growth, according to the advanced estimate released by the Bureau of Economic Analysis yesterday. The stronger-than-expected GDP growth comes after the American economy grew by 1.4 percent in the first quarter of this year. Last year saw remarkably strong growth of 2.5 percent.

Source: Reuters

GDP growth over April, May, and June was driven by increases in consumer spending, private inventory investment, and nonresidential fixed investment over this period. Consumer spending increased by 2.3 percent during the second quarter, up from an increase of 1.5 percent during the first quarter. The increase in consumer spending over the previous three months reflected an increase in spending on both goods and services. 

Imports, which are a subtraction in the calculation of GDP, increased by 6.9 percent in the second quarter, reflecting the largest quarterly increase in imports since the first quarter of 2022. Exports increased by two percent over the second quarter. 

The second estimate of GDP for the second quarter, based on more complete data, will be released on August 29.

  • Inflation Falls to 2.5 Percent in June 

The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose by 2.5 percent on an annualized basis in June, down from an annualized increase of 2.6 percent in May and annualized increases of 2.7 percent in each of the two months prior. Core PCE – which strips out food and energy prices – rose by 2.6 percent on a year-on-year basis last month, on par with the 2.6 percent year-on-year increase in core PCE in May. The annualized increase in core PCE remains at its lowest level since March 2021. This is according to the June PCE report released by the Bureau of Economic Analysis this morning. 

Source: Council of Economic Advisers

Headline PCE rose by just 0.1 percent on a monthly basis in June. This rise in prices is not significantly different from that seen last month when headline PCE remained flat. The price increases over the past two months are notably down from those seen in the first four months of this year when prices rose by 0.3 percent in April, February, and March respectively, and by 0.4 percent in January. 

Core PCE, meanwhile, showed a monthly increase of 0.2 percent in June, after showing a month-on-month increase of 0.1 percent in May, and month-on-month increases during each of the three months prior. 

The overall 0.1 percent increase in prices in June came as prices for goods fell by 0.2 percent and prices for services rose by the same margin. Energy prices fell by 2.1 percent on a monthly basis in June, more than offsetting a 0.1 percent rise in food prices on a monthly basis. 

  • What This Means for Next Week’s FOMC Meeting

The new data on inflation and GDP data come days before the Federal Open Market Committee’s (FOMC) next meeting to consider interest rates next Tuesday and Wednesday. Today’s good news is unlikely to incline the Committee to cut rates at long last from the 5.25 to 5.5 percent range where the Fed has held rates since last July. If inflation continues to trend towards the Fed’s two percent goal, the committee may finally opt to begin cuts at its September meeting, when officials will also plot their expectations for interest rate levels over 2025, 2026, and in the longer run. 

Other Developments

House Falls Short of Ambitious FY25 Funding Plan

The House hit a major snag in the appropriations process this week, deciding to head to August recess early, after the GOP pulled three of the four funding bills that were supposed to receive a floor vote. Following House Appropriations Committee Chairman Tom Cole’s (R-OK) pledge to pass all 12 funding bills before the end of July, the House started the week planning to vote on: 

  • Financial Services and General Government (FSGG)
  • Agriculture
  • Energy and Water 
  • Interior and the Environment

But early this week, amid disagreements over funding levels and abortion riders, the House GOP abandoned its plans to vote on FSGG and Agriculture. Then, to make matters worse, the Energy and Water funding bill, one of the less contentious bills within the House GOP, was also pulled after hours of debate primarily due to the failure of conservative amendments. The Interior and Environment appropriations bill did pass in a 210-205 vote on Wednesday, a small victory in the context of growing fissures within the House majority. 

While the House could still take up spending bills after returning from recess in September, Congress will have only three legislative weeks left before the end of the 2024 fiscal year. Much of its attention will be focused on negotiating a CR, which many believe will extend government funding past the election and into December, thereby avoiding a shutdown. 

The ambitious endeavor to pass all 12 spending bills, a move that was supposed to highlight House GOP unity following a tumultuous budget process last year, may not be worth the risk of further exposing fissures within the party during an election year — especially considering that the differences between the extreme and partisan House funding bills and bipartisan Senate proposals will need to be reconciled regardless of where they stand in the legislative process.

In stark contrast to the House process, the Senate has continued its work to pass its bipartisan proposals out of the Appropriations Committee. On Thursday, the Senate Appropriations members voted in favor of funding bills for: 

  • Commerce, Justice, and Science (26-3 vote)
  • Interior and the Environment (28-1 vote)
  • State and Foreign Operations (24-5 vote)
  • Transportation, Housing, and Urban Development (28-1 vote)

Instead of focusing on passing bills out of the full chamber, the Senate is hoping that the bipartisan support for its funding measures will help give it a leg up in final FY25 negotiations. The chamber will hold a markup for the remaining five appropriations bills next Thursday, and could have all 12 bills through committee before breaking for August recess. Much could change between now and the expiration of the widely expected stop-gap funding measure keeping the government open from September 30 until the post-election lame duck session.  

  • Senate CJS FY25 Bill Increases DOJ Antitrust Funding

As mentioned above, the Senate Appropriations Committee approved its Commerce, Justice, Science and Related Agencies Fiscal Year 2025 Appropriations Bill yesterday, which would provide at least $288 million in funding for the DOJ’s Antitrust Division and allow the division to keep the funding it receives through merger filing fees during fiscal year 2025. This funding is key to ensuring the division has the resources it needs to hold corporations accountable as they scrutinize and challenge mergers of increasingly large and complex firms.

The draft bill removes harmful language included in the FY24 CJS appropriations bill that blocked the division from directly accessing filing fee revenue – part of fees that corporations pay when they engage in a merger. 

We applaud CJS Subcommittee Chair Jeanne Shaheen (D-NH) for her leadership in securing this important funding. 

House GOP Introduces Bill to End Free Tax Filing Option

This week, Representatives Adrian Smith (R-NE) and Chuck Edwards (R-NC) introduced stand-alone legislation to bar funding for Direct File (H.R. 9109). The Internal Revenue Service (IRS) rolled out a pilot for Direct File – a free program that allowed taxpayers with simple returns to file their taxes directly with the IRS – during the 2024 filing season. Taxpayers in the 12 pilot states gave Direct File outstanding reviews, with 90 percent of users rating their experience positively and 86 percent saying it increased their trust in the IRS. Based on this success, the IRS recently decided to make Direct File a permanent offering and has extended an invitation to all 50 states and D.C. for the 2025 filing year. 

The Republican push to restrict the IRS’ authority and funding has primarily been playing out in the Appropriations process. The House Appropriations Committee’s FSGG bill, which was ultimately pulled due to lack of consensus within the House GOP caucus, includes deep cuts to IRS base funding and a poison pill provision barring funding for Direct File, a rider that is likely to be struck when the bill is conferenced with the Senate before final passage. 

20/20 Vision continues to support the valuable Direct File tool and advocates for its expansion to a wider slate of states next tax year. The tool has the potential to save taxpayers and the IRS considerable time and money and helps facilitate the claiming of low-income tax credits previously approved by Congress. So far Oregon is the only state in addition to the 12 original pilot states to formally announce its participation for the 2025 tax year. However, others are expected to join over the next few months due to the program’s extreme popularity and proven track record. 

Hearings

HFSC Explores Housing Solutions via Reg. Reform

On Wednesday, the House Financial Services Committee’s Subcommittee on Housing and Insurance convened a hearing on the impact of government regulations on the housing market. Led by Chairman Warren Davidson (R-OH), the GOP:

  • Decried the role that bureaucrats play at the federal, state, and local levels in pushing regulations that increase costs for home developers, thus decreasing the number of homes built and increasing the costs for existing housing.
  • Stressed how regulations on housing in areas such as energy efficiency increase the upfront costs of building a home and delay construction.
  • Denounced President Biden’s recent proposal to cap annual rent increases for corporate landlords.

Democrats, led by Representative Sylvia Garcia (D-TX) and HFSC Ranking Member Maxine Waters (D-CA), defended President Biden’s track record on housing with the following counterarguments:

  • The Administration’s pandemic relief kept 12.4 million people in their homes.
  • President Biden’s housing policies helped 1.8 million people become homeowners.
  • In contrast to GOP claims, the majority of the regulations on real estate development happen at the state and local levels, not the federal level.
  • Regulations on issues such as energy efficiency keep homes livable. 
  • The private market alone is not going to resolve the crisis: if it was, it would have done so already.

HFSC Considers AI Use in Financial Services, Housing 

On Tuesday, the House Financial Services Committee held a hearing on AI, specifically its uses in the financial services and housing sector. Led by Charman Patrick McHenry (R-NC), the GOP came out against “rushing legislation” to establish guardrails for AI use. To this effect, McHenry stated, “We cannot let the fear of the unknown thwart the US’s role as a hub for technological innovation.” McHenry and the GOP praised the potential of generative AI and stated that AI can enhance human progress as opposed to replacing it.

Ranking Member Maxine Waters and the Democrats of the committee stressed that regulation is necessary so that the benefits of AI are widely shared. Waters pointed out that AI is built by humans and uses data that can perpetuate bias and discrimination, which is all the more concerning for sectors such as financial services and housing that have a history of bias and discrimination.

House Admin. Committee Surveys Chevron Implications

On Tuesday, the Committee on House Administration held a hearing on the role of Congress after the Supreme Court overturned Chevron last month. Led by Chairman Bryan Steil (R-WI), the Republican members depicted the overturning of Chevron as returning power delegated to federal agencies back to Congress where it belongs. Among their other points:

  • They painted Chevron as taking power away from Congress and putting it in the hands of “unelected federal bureaucrats.”
  • They depicted the overturning of Chevron as an opportunity to rein in the administrative state.
  • They took shots at President Biden for his use of federal agencies to advance regulations without the approval of Congress.

The Democrats, led by Ranking Member Joe Morelle (D-NY), emphasized that Chevron was a case where SCOTUS’ conservative majority overturned decades of precedent in a way that harmed the American people. Their counterarguments included:

  • Overturning Chevron transfers power from Congress and the Executive Branch to the courts.
  • It gives less deference to the employees of federal agencies that actually have expertise in the subject matter in question and gives more power to unelected judges.
  • It weakens federal agencies in a way that will likely benefit corporations and the wealthy.
  • Congress will now need to significantly expand its staff and capabilities to deal with its new statutory burdens, which will be difficult with the current state of Congress.

Democrats have increasingly pushed for legislation to enshrine Chevron into law. Earlier this week, Senator Elizabeth Warren was joined by ten other Democratic senators in introducing the Stop Corporate Capture Act to the Senate for this explicit purpose.

Look Ahead

Tuesday, July 30

Wednesday, July 31

Friday, August 2

  • July jobs report

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