Wall Street underestimated the US economy

Wall Street misjudged the strength of the United States economy by a significant margin.

The Bureau of Economic Analysis says that the US economy grew more than first thought in the first quarter.

The BEA's third estimate of gross domestic product (GDP) showed that the US economy grew by 2% in the first quarter. This is a big jump from the previous estimate, which was only 1.3%.

The change doesn't change the fact that the rise in the third and fourth quarters of 2022 was 3.2% and 2.9%, respectively. The GDP revision is just one of many economic measures that are better than economists expected.

Also on Thursday, new data showed that the first signs of a rise in weekly jobless claims, which could mean that the job market is weakening, haven't come true. With 239,000 claims in the week ending June 24, the number of people looking for work was at its lowest level since May.

Tuesday, data showed that consumer sentiment in June was at its highest level in 18 months. Other data showed that orders for durable goods went up in May, even though economists had expected a drop, and that new home sales in May were higher than expected.

Gregory Daco, Chief Economist at EY, said on Thursday that the US economy is showing real signs of strength. "This is making a lot of people wonder if the long-predicted recession is really going to happen or if the economy could have a "soft landing," where inflation drops to 2% without a recession.

Because of the strong numbers, economists have had to change their predictions for a recession, and investors have had to change what they expect from the Federal Reserve. The CME FedWatch Tool says that as of Thursday morning, futures tied to the Fed's base interest rate show that there is an 86.8% chance that the Fed will raise interest rates at its July meeting. That's up more than 10 percentage points in the past week and 30 percentage points in the past month.

Citi's team of economists wrote in a note on Thursday, "The Fed is trying to slow down an economy with a lot of momentum, but recent data (like a drop in jobless claims released at the same time as GDP revisions) suggest that policy may not yet be restrictive enough to do so." "Risks to consensus growth forecasts remain to the upside, which also creates an upside risk for inflation outcomes."

In recent comments, Federal Reserve Chair Jay Powell has hinted that interest rates might stay high for a while longer. Powell said again last week that the Fed is likely to have to raise rates again in 2023. Powell said on Wednesday that inflation isn't going down as quickly as he had planned.

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"Since the middle of last year, inflation has slowed down a bit," Powell said in prepared comments for a speech he gave at the Bank of Spain on Thursday. "Inflation pressures are still high, and it will take a long time to get inflation back down to 2%."

The Personal Consumption Expenditures index, which measures inflation, will be released on Friday. The print is likely to show that "core" PCE, which excludes the costs of food and energy, rose 4.7% over the same time last year, which is the same as what happened in April. On average, the Fed wants inflation to be 2%. In May, "core" PCE is projected to go up 0.4% from the month before.