Federal Reserve Chairman Kevin Warsh recently outlined his perspective on the current state of the US economy, noting its overall strength and resilience against various shocks. He pointed to robust business capital expenditures, particularly in AI-related buildouts, which have seen a 9% growth rate in equipment and intangibles investment over the past four quarters, the highest since 2021. This surge in investment is contributing to high expectations for future economic growth and corporate earnings.
Warsh also highlighted the strong performance of corporate profits, with S&P 500 firms experiencing over 20% profit growth in the last year, and profit margins remaining elevated. Equity market volatility is low, and credit conditions appear favorable, with corporate bond and leveraged loan spreads near historical lows and strong issuance volumes. The Senior Loan Officer Opinion Survey indicates easier lending standards for commercial and industrial loans, facilitating growth in these areas. Real consumer spending has also been healthy, increasing by more than 2% over the past year, contributing to a nearly 3% rise in private domestic final purchases (PDFP).
Despite these positive indicators, Warsh expressed significant concern regarding inflation, which he stated is the Fed's primary focus. The Fed's preferred measure, the 12-month change in the PCE price index, stands at 3.7%, while the six-month change is 4.1%, both well above the 2% target. Similar elevated readings are observed in the CPI and core inflation measures. He noted that while recent summer inflation readings were better than expected, they do not signal a meaningful improvement in underlying trends. Analysis of the PCE basket shows that 54% of goods and services had price increases above 3% over the past 12 months, and 49% over the past six months, both significantly higher than pre-pandemic levels.
In the labor market, the US is performing well, with a stable jobless rate of 4.1%, which has remained consistent for several years. Unemployment claims, on a four-week average, are near their lowest level in decades, indicating a robust employment picture. However, the persistent inflation figures prompted traders to increase the probability of a September rate hike to 55.7% following Warsh's speech, up from about 35%. Analysts largely interpreted his remarks as hawkish, suggesting that the Fed is likely to raise interest rates this year if inflation does not recede, potentially with a quarter-point hike in September followed by another in December.
