Economic Update Spring 2024

The U.S. economy is in expansion with no recession in sight. The odds of a soft landing in the US economy have risen as progress has been made on inflation and the Federal Reserve’s (Fed) is ending its tightening cycle. The lag effects of monetary policy have not impacted the US economy like in past tightening cycles. This time around the US economy appears more immune to interest rate hikes than in the past. Fiscal stimulus has bolstered consumer savings and spending which in turn enhanced businesses income statements. However, the record stimulus spending that helped the US economy avoid a recession came at the cost of record Treasury debt – simply put too much debt kills future spending in households, businesses, and governments with no exception.

The GDPNow model estimate for real GDP growth in the first quarter of 2024 is 2.4%. CNBC/Moodys analytics projects 1.3% GDP for 2024. Economic growth projections are not even close to inflationary and are below the 3.15% average annual real growth rate of the US economy since 1950. The U.S. Leading Economic Indicators (LEI) rose last February for the first time since the beginning of 2022. The LEI Index continues to point towards slower growth going forward. The ISM Services PMI index, a measure of economic activity in the services sector, remains in expansion readings - the 15th consecutive month. Whereas the ISM Manufacturing PMI (Purchasing Managers’ Index) rose into expansion readings after 16 consecutive months of contraction. Even the very economically important Housing sector is perking up with existing homes sales surging in February according to the National Association of Realtors. Suggesting borrowers are getting acclimated to normal interest rates and demand will decide sales and not today’s mortgage rates.

Headline inflation as measured by the Consumer Price Index (CPI) came in hotter than expected in March and rose 3.5% on a yearly basis. For a reference point, from 1960 to 2022, the average inflation rate was 3.8% per year according to Federal Reserve data. Higher rents, commodity inflation, and higher oil prices due to heightened geopolitical risk are pushing up the cost of living. There has been progress made on reducing the inflation “rate of change” from its a peak of 9.1% in 2021. Although the level of inflation remains at an all-time high. Bespoke research reported that the four-year rate of change in headline CPI exceeded 20% for the first time since 1991. Core CPI, which excludes volatile food and energy prices, also came in hot in March while rising 3.8% from a year ago. Atlanta Fed's Sticky-Price CPI remained elevated in March. The Atlanta Fed's sticky-price consumer price index (CPI)—a weighted basket of items that change price slowly—increased 4.5% year-over-year. The Core Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation with less emphasis on rent cost, rose 2.8% y-o-y in March drifting which shows y-o-y progress with the inflation fight. Core PCE just must reach 2.49% for the Fed to seriously consider cutting.

Stubborn inflation adds to expectations the Fed may not lower interest rates as soon or even this year. Historically, Federal Reserve cuts 150-200 basis points in an easing cycle. This time the Fed may only cut by 25 basis points one to three times because the economy never sank into recession. The fact that the US economy is still in an expansion and inflation persistent, means the Fed is in no rush to cut. The Fed might even wait until this November after the election to cut. The CME Group probabilities for Fed Fund Rate Futures forecast are 28% in June and 58% in July. It is more important for households and businesses to experience economic growth that is not inflationary after what has happened to the cost of living since 2020.

The Labor market in March continues to show its strength evidenced by payrolls coming in above consensus, the participation rate rising, unemployment rate dipping to 3.8%, and wages rising 4.1% from a year ago. Continued Claims (Insured Unemployment) has risen by 5.3% in the last 12 months. Historically a rise of 13% in a year from lows is one signal of cracks beginning in the Labor market. The 4-Week Moving Average of Initial Claims is trending lower from twelve months ago but is now moving higher from its low point last January. Altogether, there is still no recession signal coming from the Labor market.

Finally, the Real Median Household Income Index has declined over the last two years despite a lift in wages due to inflation. Despite the ill effects of inflation on consumer purchasing power, consumer spending is holding, retail sales were higher in March by 3% y-o-y. Consumers are drawing on higher net worths (selling investments), higher wages, and remaining excess COVID stimulus savings. However, the current inflation rate is still running too high and is accumulating like snow in a blizzard to the cumulative gain in cost of living.