Economic growth in Q1 2023 was much better than pundits and economists predicted. First Quarter rose from its second estimate of 1.3 percent to 2.0 percent growth in the first quarter, largely because consumers spent more.
Exports were also higher, and consumer spending rose a whopping 4.2 percent annually from its second 3.8 percent guesstimate. Governments spent more as well, thanks to the recovery aid pouring into state coffers.
Why the consumer spending spree? Disposable personal income increased $587.9 billion, or 12.9 percent, in the first quarter, an upward revision of 0.5 percent from the previous estimate. And real (after inflation) disposable personal income increased 8.5 percent, an upward revision of 0.7 percentage point.
Also, personal saving was $840.9 billion in the first quarter, an upward revision of $11.6 billion from the previous estimate. The personal saving rate——personal saving as a percentage of disposable personal income—was 4.3 percent in the first quarter, an upward revision of 0.1 percentage point, said the BEA.
So consumers are still feeling flush, which is why consumer confidence is also soaring. The Conference Board’s survey of U.S. consumer confidence jumped to a 17-month high of 109.7 in June, reflecting a slowdown in inflation and fewer worries about a recession.
Now we must worry about a too-hawkish Fed spoiling the party by continuing to boost their interest rates. And that’s because conventional economists such as former Fed Chair Ben Bernanke (who once worried about too little inflation after the Great Recession) are saying even after the price of everything else returns to a 2 percent inflation target, high wages will keep the inflation fires burning.
In a just released working paper co-authored by former World Bank Chief Economist Olivier Blanchard, they said:
“We find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge that began in 2021 was the result of shocks to prices given wages, including sharp increases in commodity prices and sectoral shortages. However, although tight labor markets have thus far not been the primary driver of inflation, the effects of overheated labor markets on nominal wage growth and inflation are more persistent than the effects of product-market shocks. Controlling inflation will thus ultimately require achieving a better balance between labor demand and labor supply.”
This is once again looking in the rear-view mirror of the seventies when oil prices soared and unions had more negotiating power. But the US is no longer dependent on Saudi oil, since we developed our own oil supply, and renewable energy comprises a growing share of energy generation.
And where are inflation expectations, even if Bernanke, et. al. believe we have an overheated labor markets? Still anchored at 3 percent longer term.
For instance, the University of Michigan Consumer sentiment survey reported earlier its drop in year-ahead inflation expectations receded to 3.3 percent in June from 4.2 percent in May. The current reading is the lowest since March 2021. In contrast, long-run inflation expectations were little changed from May at 3.0 percent, again staying within the narrow 2.9-3.1 percent range for 22 of the last 23 months.
This is in line with the big drop in the retail Consumer Price Index from 4.9 percent to 4.0 percent, the best news yet that the Fed is winning the inflation battle. It was the smallest 12-month increase since the period ending March 2021. The all items (core) less food and energy index rose 5.3 percent over the last 12 months.
In fact, the so-called labor demand and supply imbalance can only be cured over the longer term by creating smarter immigration policies and modern technologies that improve worker productivity, due to Americans’ lower birth rate.
The Fed has little reason to intervene in what is essentially a Big Business/Labor negotiation.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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