Warsh, who has led the Fed since May, told the Jackson Hole crowd he follows a specific set of indicators to judge the US economy and that the list is neither complete nor final. He said he plans to revisit how the central bank interprets incoming data.
He cast capital spending as the fuel for future growth and noted that tech firms are committing hundreds of billions of dollars to gear and infrastructure tied to artificial intelligence. "The four-quarter change in investment in equipment and intangibles has been around 9%, its highest growth rate since 2021. More than half of the capex growth this year can likely be ascribed to the build-out related to AI." Nonresidential fixed investment rose at an 8.5% rate in the second quarter, according to the Bureau of Economic Analysis.
On profits, he said margins are elevated. A Bureau of Economic Analysis metric that compares after tax profits to gross value added increased to 19.4% from 18.2% in the second quarter, the highest in records back to the 1940s.
Warsh added, "For firms in the S&P 500, profits have grown by more than 20% over the past year. Profit margins are quite elevated, relative to history. Overall equity market volatility is low. We're staying keenly focused on market internals, watching performance across sectors."
Warsh said credit markets are signaling confidence. He noted that credit risk premia for corporate bonds and leveraged loans sit near the low end of their typical ranges. He also pointed to the Senior Loan Officer Opinion Survey on Bank Lending Practices, which currently shows standards for commercial and industrial loans on the looser side compared with history. "That helps explain the growth we've seen this year in those loans. Credit and loan markets are showing few signs of policy restraint."
On demand, Warsh said consumers have spent more briskly than many forecasters anticipated despite elevated inflation. He said inflation adjusted spending remained robust throughout the second quarter, though July showed signs of a pause. He highlighted private domestic final purchases - a demand gauge that excludes government outlays, inventories and trade - and said it has climbed by almost 3% this year. "That's a measure that typically carries more signal than gross domestic product, and the trend here too is positive."
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Warsh called the labor market steady. He acknowledged low job switching, which he tied to the frantic employer-employee reshuffling after the pandemic, and said slow labor supply growth will naturally restrain job gains. He also said, "People who want to work, by and large, are holding or finding jobs. They may well be concerned about possible future labor disruptions, but as of now, I believe the labor markets are consistent with full employment." Unemployment measures remain near lows not seen in decades.
On inflation, Warsh said it is still running well above the Fed's 2% goal, though recent readings suggest some cooling. The core personal consumption expenditures price index rose 0.2% in July from the prior month and 3.3% from a year earlier.
To get a clearer read on underlying pressures, he said he breaks apart the 199 components of the PCE price index and noted, "Over the past 12 months, 54% of goods and services in the PCE basket showed price increases above 3%. This is well below the post-pandemic highs of about 77%, but it remains well above the level of 32% in the two decades that preceded the pandemic." He added that inflation expectations remain well anchored, but cautioned, "The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don't. Those expectations are not pushed around easily, and right now they are well anchored. But they must be closely minded."
Warsh sketched an economy where business investment, solid margins, easy credit, resilient demand, steady jobs, and inflation that is cooling but still high all shape the policy conversation. He emphasized that his dashboard is not the final word and that he pledged to reconsider the Fed's approach to evaluating the data. Translation for your money: policy will be guided by a wide set of real economy markers - from capex and profit shares to loan standards and the 199 building blocks of PCE - not just one headline number.
