Fed heads for policy error as US economy hits the brakes

The Atlanta Fed’s GDPNow measure has screeched to a halt:

This measure is a very good leading indicator for US growth so pay attention to it. TSLombard has more:

The anticipated Q3 slowdown was very much in evidence in the August personal income data–they indicate 1% real consumption growth Q/Q (SAAR) in Q3 and 3.5% for real GDP. GDP will get to above trend growth in Q3 from how the mix of investment spending, inventory, and net exports adds up. This combination was also key to our original expectation of 6% Q/Q growth for real GDP in Q3. What changed is that consumption growth slowed even faster than expected. A slowdown in consumer spending was inevitable coming on the heels of an incredible spring quarter of 12% Q/Q SAAR growth in real consumption and an 11.4% increase in Q1. These increases were rooted in reopening and stimulus payments, and stimulus from both is now past tense. Still,the continued high spending levels andexpansion in employment and wages, means that this Q/Q slowdown is largely a statistical event, and growth rates in Q4 will return to those that are more typical of an economy still recovering from a recession. This is not stagflation. The monetary question is whether current policy is too easy for the growth rates soon to be in evidence. The FOMC seems to think so–they announce taper in November (right in line with our forecast from last year) and are now sending signals about raising the funds rate twice(!) in 2022. All this ties to an inflation outlook the Fed now sees a less benign, but broad brush strokes applied to the inflation data miss key details that suggests a more aggressive Fed policy is not necessarily the right tack.