US Economy Keeps Defying Expectations

Happy Thursday! We got some surprisingly good news on the economy this morning. The House, meanwhile, canceled Friday floor votes and headed out for its August recess. The Senate is still working toward a final vote on the annual defense policy bill, which could come late tonight, and appropriators in the chamber advanced the last of 12 annual spending bills.

Here’s what you need to know.

With Spending Fight Looming, House Starts August Recess Early

The House on Thursday passed one annual spending bill, punted on another and then dismissed lawmakers early for a six-week recess, setting up a crunch to avoid a government shutdown by the September 30 deadline.

“Members are advised that votes are no longer expected in the House tomorrow,” Majority Leader Steve Scalise, a Louisiana Republican, announced from the House floor. Scalise said there would be one final vote series on Thursday. “Then we will be finished for the August work period,” he said.

The break comes after the House passed its first 2024 appropriations bill, funding military construction projects and the Department of Veterans Affairs via a 219-211 vote. Two Republicans joined with all Democrats in opposing the bill.

A second funding bill, covering appropriations for agriculture and the Food and Drug Administration, has been delayed by an internal GOP clash related to language in the bill overturning FDA guidance allowing the abortion pill mifepristone to be sold by mail and at pharmacies. About a dozen moderate Republicans demanded that the measure be removed from the spending bill, which also calls for sharp cuts to nutrition programs. Far-right members say they won’t approve the agriculture bill if the abortion-related measure is cut. They also want additional spending cuts that some moderates oppose.

Republicans in disarray: The fate of the annual spending bills remains uncertain as some conservatives push for spending cuts that go beyond the cap levels set by the deal reached earlier this year by House Speaker Kevin McCarthy and the White House. “McCarthy’s leadership team hoped to pass as many of their 12 annual funding bills as possible on the floor this month, aiming for a show of Republican unity that might bolster the House in a coming standoff with the Senate over federal funding,” Politico’s Meredith Lee Hill reports. “Now House GOP lawmakers are leaving the Capitol on a note of disarray rather than cohesion, with a single passage vote to tout on a veterans funding bill and two spending measures still stuck in committee.”

Senate appropriators pass final four spending bills: Senate appropriators on Thursday advanced the final four government funding bills they needed to pass, including those for Defense and Homeland Security. “This Committee just finished passing all 12 individual appropriations bills in overwhelmingly bipartisan votes—and we did it before the end of July. Everyone who follows this process knows that is a big deal,” said Senate Appropriations Chair Patty Murray, a Democrat from Washington. “It is not mission accomplished. As we all know, we still have to get these bills passed through the full Senate, and the House, and signed into law, and I know that all of us are going to work really hard to get that done. But this is a really big deal.”

What’s next: Well, the August recess. But the House still has 11 appropriations bills to pass when it returns on September 12 and reconciling House spending levels with the higher levels the Senate is aiming for will be an immense challenge. And funding the government will be just one of a handful of crucial tasks lawmakers will face when they return with 12 legislative days to go before the September 30 deadline.

On the bright side: “This week wasn’t a total legislative loss — the Senate did designate July 2023 as National Blueberry Month and the House held a subcommittee hearing on UFOs with the implication it would be holding more in the near future,” writes TD Cowen analyst Chris Krueger.

The bottom line: A brutal September lies ahead and a government shutdown in October appears increasingly likely. Failure to enact new spending bills by January 1 would mean an across-the-board 1% cut to discretionary spending under the terms of the deal between McCarthy and Biden.

US Economy Defies Expectations as Growth Picks Up

Despite fears of a slowdown amid rising interest rates, economic growth accelerated to an annual rate of 2.4% in the second quarter of 2023, the Bureau of Economic Analysis reported Thursday.

The first estimate for the April to June period was stronger than expected, registering an increase from the 2% growth rate in the first three months of the year.

Although the rate of growth of household consumption dropped from the previous quarter, it still increased by 1.6%, with much of the growth coming in services, including travel and entertainment. Business investment was strong, as well, growing at an annual rate of 7.7%, buoyed by federal incentives for computer chip and electric vehicle manufacturing.

It was a “near Goldilocks report on GDP,” said Diane Swonk, chief economist at KPMG. “I don’t think I have used that term since the 1990s. We don’t live in [a] fairy tale and there are no guarantees it will last but for the moment, it is worth celebrating.”

Joseph Brusuelas, chief economist at RSM, said the economy continues to defy expectations. “If you’re looking for a working definition of ‘resilient,’ look no further than the American economy,” he told The New York Times. “This is absolutely rock-solid.”

Bidenomics in action? The White House celebrated the report, and gladly took credit for the results. “The economy’s continued growth builds on what was already the strongest pandemic recovery and lowest inflation of any G-7 country,” President Joe Biden said in a statement. “This progress wasn’t inevitable or accidental—it is Bidenomics in action, growing the economy from the middle out and bottom up, not the top down.”

Still, some analysts are predicting a slowdown later in the year, driven by a drop in consumption as pandemic-era savings finally run out. “All those tailwinds and buffers that were supporting consumption are not as strong anymore,” Blerina Uruci, chief U.S. economist at T. Rowe Price, told the Times. “It feels to me like this hard landing has been delayed rather than canceled.”

Even if the economy manages to avoid a recession, as a growing number of analysts now think it could, its continued strength could present a problem for the Federal Reserve as the central bank seeks to bring inflation under control. Bloomberg economist Anna Wong said the latest GDP report “reflects an economic force working against the Fed’s efforts to reduce inflation — expansionary fiscal policy.” The result could be more restrictive Fed policy, with more interest rate increases ahead. And that could cause the recession that the economy has managed to avoid so far.

Chart of the Day

Interest payments on the federal debt rose to nearly $1 trillion on an annualized basis in the second quarter of 2023. “Debt soared to record levels as the Treasury scrambled to finance the government’s pandemic-relief emergency spending,” says Bloomberg’s Alex Tabi. “Interest payments have grown almost twofold since Covid-19 was declared a pandemic. And payments will likely increase further as US debt is expected to grow in the coming years according to the Congressional Budget Office.”

CBO Director Swagel Gets Four More Years

House and Senate leaders on Thursday appointed Congressional Budget Office Director Phillip Swagel to a second four-year term. An economist who has also served on the Council of Economic Advisers, the Federal Reserve Board and at the Treasury Department, Swagel became the tenth CBO director on June 3, 2019. His second term will last until January 3, 2027.