Fourth Quarter Growth Even Better

 The Mortgage Corner

Economic growth is picking up and the housing market is following suit, which means the post-pandemic recovery is looking even better this year.

The final reading of Q4 2023 U.S. Gross Domestic Product growth adjusted for inflation (real GDP) was raised slightly to a 3.4% annual pace, reflecting strong consumer spending and a surprisingly resilient economy. The government’s second estimate of GDP had forecast a 3.2% rate in the final three months of last year.

This will no doubt call for a slowdown in the Fed’s rate cuts by those worried about inflation, but will that matter when housing in particular needs to recover? Everyone should be happy, in other words.

Adjusted pretax corporate profits surged in the fourth quarter at an annual 4.1% rate, indicating that businesses are in good shape. Consumer spending, the main engine of the economy, was revised up to a 3.3% increase in the fourth quarter instead of 3%.

And inflation using the personal-consumption expenditure — or PCE — rose at a mild 1.8% annual rate in the fourth quarter, unchanged from the prior estimate. The more closely followed core rate was lowered a tick to a 2.0% annual rate — matching the Fed’s 2% inflation goal.

BEA.gov

Inflation expectations measured by the University of Michigan sentiment survey also showed inflation expectations continue to decline.

“Year-ahead inflation inched down from 3.0% last month to 2.9% this month,” said survey Director Joanne Hsu. “For the third straight month, short-run inflation expectations have fallen within the 2.3-3.0% range seen in 2018 and 2019. Long-run inflation expectations also inched down, from 2.9% to 2.8%, and remain modestly elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.”

Even better news was that the number of Americans who applied for unemployment benefits last week fell slightly to 210,000 and continued to hover at very low levels in a sign of strength for the economy. There were 212,000 unemployment filings, according to government figures.

Jobless claims tend to rise steadily when the economy gets worse. They’ve held fast this year in a narrow range of 194,000 to 225,000 — an extremely low level historically.

Claudia Sahm a former Federal Reserve economist noted for creating a formula for predicting upcoming recessions, is bucking the trend of economists worried about inflation by calling for the Fed to cut rates sooner.

In a series of conversations with MarketWatch over the past month, Sahm said she wants the Fed to ease rates — which are currently in the range of 5.25% to 5.5% — ASAP, according to MarketWatch’s Greg Robb. She’s not advocating for a dramatic cut but says the Fed needs to get the ball rolling on easing the tight monetary policy it has implemented over the past two years to help cool the economy and quash out-of-control inflation.

“But recessions are like snowballs, Sahm said: They start very small but can grow big enough to trigger avalanches, which can then sweep down on the economy — wiping away jobs, economic growth and income for millions of people.”

There’s another reason to begin to cut interest rates ASAP. The housing market needs a boost. Existing-home sales jumped in February and a survey of future home sales is also increasing.

Pending home sales in February grew 1.6%, according to the National Association of Realtors^®. The Midwest and South posted monthly gains in transactions while the Northeast and West recorded losses. All four U.S. regions registered year-over-year decreases.

The Pending Home Sales Index (PHSI)^* – a forward-looking indicator of home sales based on contract signings – increased to 75.6 in February. Year over year, pending transactions were down 7.0%. An index of 100 is equal to the level of contract activity in 2001.

“While modest sales growth might not stir excitement, it shows slow and steady progress from the lows of late last year,” said NAR Chief Economist Lawrence Yun. “Ongoing job gains are clearly increasing demand along with more inventory.”

Could economic growth be firing on all cylinders this year if the housing market recovers? It would be for the first time in years and a sign that we are finally over the COVID pandemic.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Irrational Exuberance vs. Irrational Pessimism?

 Popular Economics Weekly

I don’t believe Wall Street investors are irrationally exuberant at present, contrary to those that say we are now in a stock market bubble with the record level S&P and DOW indexes.

It’s as easy to be irrationally pessimistic about the future as are many Main Streeters that don’t feel so good about themselves or the US economy.

The indexes are high because corporations show record profits, in part thanks to the $trillions in pandemic aid, but also because of the excessive profit-taking by major retailers that took advantage of the product shortages caused by the COVID pandemic shutdowns, which has been confirmed by the FTC.

Large grocery store chains exploited product shortages during the pandemic by raising prices significantly more than needed to cover their added costs and they continue to reap excessive profits, according to a Federal Trade Commission report.

Much of Main Street, ordinary working adults in the main, have become the opposite, irrationally pessimistic, in my opinion. Surveys such as a recent PEW Research survey I highlighted last week show this is so.

In a poll by PEW Research, “About three-in-ten Americans (28%) currently rate national economic conditions as excellent or good, while a similar share (31%) say they are poor and about four-in-ten (41%) view them as “only fair.”

PEW

Why such divergent opinions when we are fully employed and have surging economic growth? The most recent Conference Board’s Consumer Confidence survey helps to explain it.

Right and left wing partisans are now controlling the debate. Middle-income Americans, which are most working Americans, are exhausted and pay little attention to economic data, which is difficult to understand even by economists.

Most consumers remain concerned about high inflation, the contentious budget debate, and partisan bickering of the Presidential election campaign.

“Consumers remained concerned with elevated price levels, which predominated write-in responses, said Dana Peterson, its Chief Economist. “March’s write-in responses showed an uptick in concerns about food and gas prices, but in general complaints about gas prices have been trending downward. Indeed, average 12-month inflation expectations came in at 5.3 percent—barely changed from February’s four-year low of 5.2 percent.”

“Recession fears continued to trend downward both in write-in responses and as measured by consumers’ Perceived Likelihood of a US Recession over the Next 12 Months,” he continued. “Meanwhile, consumers expressed more concern about the US political environment compared to prior months.”

The PEW survey chart above shows the tug-of-war between extreme right and left political factions controlling the debate, while 41% of the Americans surveyed viewed economic conditions as “only fair”.

Why? Most Americans are exhausted and still recovering from the pandemic. There is a divergence between those experiencing irrational exuberance vs. irrational pessimism because most of those polled aren’t as knowledgeable about real economic data and business cycles that are published by the government and private providers. So they must rely on their immediate experience; much of it due to the trauma caused by the COVID pandemic that killed one million Americans.

PEW said, however, expectations for future economic conditions are more positive than they were last spring: Today, roughly a quarter say that they expect economic conditions will be better a year from now (26%) – up from 17% in April 2023.

There is hope, in other words, because of a resurgent US economy, the strongest economy in the world, that they will eventually realize their jobs are safe and secure in such an environment.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New-Home Sales Boost Housing Market

The Mortgage Corner

The sale of new homes is boosting housing and the economy at a very opportune time—the beginning of a New Year when it’s still uncertain when the Fed will begin to cut their interest rates.

It’s a heartening sign that consumers are not waiting longer for mortgage rates to fall. So far, 30-year conventional fixed rates are staying close to their high of 7 percent, so that some one-third of sales are all cash transactions.

Sales of new single‐family houses in February 2024 were at a seasonally adjusted annual rate of 662,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.3 percent (±16.2 percent)* below the revised January rate of 664,000, but is 5.9 percent (±14.3 percent)* above the February 2023 estimate of 625,000.

USCensusBureau

The median sales price of a new home sold in February fell to $400,500 from $414,900 in the prior month. The seasonally‐adjusted estimate of new-home supply was 8.4 months at the current sales rate. The growing supply of new homes is bringing down prices.

Overall, home buying demand for newly built homes remains strong because resale home inventory is still low, though existing home sales are also rising.

Sales are likely to pick up further as mortgage rates are expected to decline through the rest of the year. Fannie Mae expects the 30-year mortgage to end the year at 6.4%, versus the 6.87% as of March 21, per Freddie Mac data.

This must be why builder confidence rose for the fourth month in row in March, in line with growing buyer demand.

The expectations of a jump in demand in the coming months pushed the National Association of Home Builders’ (NAHB) monthly confidence index up 3 points to 51 in March, the trade group said on Monday.

That’s also why housing starts jumped in February as well, I said last week. Construction of new U.S. homes rebounded 10.7% in February to an annual pace of 1.52 million units, reported the Commerce Department last Tuesday. Single Family Starts are up 35% Year-over-year in February; though Multi-Family Starts were down sharply, said the NAHB. That is the biggest gain in nine months.

“The solid level of single-family production in February tracks closely with rising builder sentiment, and with mortgage rates expected to moderate further this year, this will provide an added boost for single-family building,” said Carl Harris, chairman of the National Association of Home Builders (NAHB). “But policymakers need to help the industry's supply-chains in order to protect housing affordability and add much needed supply to boost inventory.”

Might a proposed settlement by the National Association of Realtors (NAR) to bring down the standard commission paid by Sellers speed up home sales this year by reducing sale costs?

The settlement proposed by the National Association of Realtors, which will go into effect in mid-July if it’s approved, would require that listings on the NAR-run Multiple Listing Service — a database of homes for sale — no longer have a field showing how much buyer’s agents will earn in commissions on the sale.

Although fees for real-estate agents are technically negotiable, they typically run from 4% to 6% of a home’s sale price, depending on local market customs. Home sellers traditionally pay these commissions, which are then typically split between the buyer’s and seller’s agents.

This might make a difference in prices for entry-level homes, where the profit margins are lower, and buyers more price-conscious. Anything that reduces costs is welcome in a reviving housing market.

New-home construction and sales are an important segment of our economy because they employ many in sectors other than construction, such as finance, insurance, and advertising. So when positive and growing it boosts overall economic growth.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen 

Strong Growth Will Continue

 Financial FAQs

There’s a good reason we have avoided a recession, I said last week. Consumers’ personal financial conditions have improved, so they continue to shop, and they are responsible for 70 percent of economic activity.

Now the Conference Board’s Index of Leading Economic Indicators (LEI) is agreeing with them for the first time in six months. It is one of the few indexes that attempts to predict future growth but has been stagnant for two years and showed negative GDP growth since August 2023.

“The U.S. LEI rose in February 2024 for the first time since February 2022,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Strength in weekly hours worked in manufacturing, stock prices, the Leading Credit Index™, and residential construction drove the LEI’s first monthly increase in two years…Despite February’s increase, the Index still suggests some headwinds to growth going forward. The Conference Board expects annualized US GDP growth to slow over the Q2 to Q3 2024 period, as rising consumer debt and elevated interest rates weigh on consumer spending.”

It uses indicators such as the direction of interest rates and workers’ hours to gauge future trends. The LEI is still lagging real GDP growth, per the below graph of both.

Conference Board

Because the main contributors to manufacturing’s current growth are a roaring stock market and increased working hours in manufacturing, will manufacturing finally come to life this year?

Preliminary S&P indexes for manufacturing and the service sector are both ‘flashing’ green lights. The flash U.S. manufacturing purchasing managers index climbed to a 22-month high of 52.5 this month from 52.2 in February. The S&P flash U.S. services PMI slipped to a three-month low of 51.7 in March from 52.3 in the prior month, but numbers above 50 signal growth in the economy.

The Atlanta Fed puts out another predictor of future growth. Its GDPNow Q1 estimate is 2.1 percent on March 19, down from 2.3 percent from March 14 after slowing first-quarter personal consumption expenditures growth and first-quarter real gross private domestic investment growth.

This may be temporary, however, as consumers and businesses are usually cautious at this time of the year while they attempt to assess their future.

The good news is that Wall Street is booming and even the housing market seems to be recovering, in spite of the Fed’s inaction on interest rates.

Stock indexes are at record highs, and existing-home sales surged 9.5% in February to a seasonally adjusted annual rate of 4.38 million, the largest monthly increase since February 2023. The inventory of unsold existing homes increased 5.9% from one month ago to 1.07 million at the end of February, or the equivalent of 2.9 months’ supply at the current monthly sales pace, which will further boost sales.

Federal Reserve Chairman Powell said they are in no hurry to cut interest rates because the US economy is meeting the Fed’s twin mandates of stabile price and maximum employment in his latest congressional testimony.

This should reassure Americans there is strong growth ahead.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

US Consumers Want Stabile Growth

 The Mortgage Corner

More consumers, and most Americans, are deciding they want calm after the Pandemic era. They are craving fewer economic disruptions for starters, such as the partisan wars that have stymied budget negotiations.

“Nearly three-quarters of Americans (73%) rate strengthening the economy as a top priority. That is considerably larger than the shares citing any other policy goal,” reports a recent PEW Research poll.

With Americans fully employed for more than two years and average wages rising faster than inflation, it is boosting consumer confidence and hence consumer spending. This is in turn boosting economic growth.

The US economy averaged 2.5 percent real GDP growth last year, and predictions are for 2-3 percent average GDP growth this year.

The latest University of Michigan sentiment survey highlights their wish for stability.

“Consumer sentiment moved little this month with a 0.4 index point decrease that is well within the margin of error, and thus sentiment has been steady and essentially unchanged since January 2024…After strong gains between November 2023 and January 2024, consumer views have stabilized into a holding pattern; consumers perceived few signals that the economy is currently improving or deteriorating. Indeed, many are withholding judgment about the trajectory of the economy, particularly in the long term, pending the results of this November’s election.”

Conferenceboard.org

The other Conference Board confidence survey was similar with overall inflation remaining the main preoccupation of consumers, and are a bit less concerned about food and gas prices, which have eased in recent months. But they are still concerned about the labor market situation and the US political environment.

Stability is what Americans crave after COVID and two ongoing wars. Americans reacted similarly once before, during the Great Depression in the 1930s that resulted in 25 percent of working Americans unemployed.

FDR was then elected that brought in a New Deal. This time it’s the Biden creating the bipartisan new, New Deal that is spending $billions on renewing our infrastructure, manufacturing with the CHIPS Act, in social services, and combating climate change with the Inflation Reduction Act. It will boost economic growth for the rest of this decade.

Further signs of a strengthening economy are in the housing industry. Builder confidence rose for the fourth month in row in March, as buyer demand remained strong.

The expectations of a jump in demand in the coming months pushed the National Association of Home Builders’ (NAHB) monthly confidence index up 3 points to 51 in March, the trade group said on Monday.

Calculated Risk

Housing starts jumped in February as well. Construction of new U.S. homes rebounded 10.7% in February to an annual pace of 1.52 million units, the Commerce Department reported Tuesday. Single Family Starts are up 35% Year-over-year in February; Multi-Family Starts Down Sharply, said the NAHB. That is the biggest gain in nine months.

“The solid level of single-family production in February tracks closely with rising builder sentiment, and with mortgage rates expected to moderate further this year, this will provide an added boost for single-family building,” said Carl Harris, chairman of the National Association of Home Builders (NAHB). “But policymakers need to help the industry's supply-chains in order to protect housing affordability and add much needed supply to boost inventory.”

That means interest rates must come down this year to continue to support housing affordability, in particular. Housing has traditionally led economic recoveries, so it is an important indicator of when we will break out of the current holding pattern.

Congress has just reached final agreement on the federal budget for the rest of this year, which will further enhance economic stability during the election season.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Inflation Is the Problem

 Popular Economics Weekly

There is a reason the Biden administration wants to prevent the merger of Kroger and Albertsons Supermarket chains. It lowers competition at a time when the largest retailers are now responsible for much of the inflation that has fueled the Fed’s reluctance to lower interest rates.

How do we know that? Retail companies such as Walmart, Home Depot, Costco, Lowes, CVS, and Target have reported record profits since the Pandemic, according to a recent report by Accountable.us, a nonpartisan 501(c)3 organization that reports on “special interests that too often wield unchecked power and influence in Washington and beyond.”

It reports that “a new analysis of earnings data of the ten largest U.S. retailers by market capitalization finding that they all raised consumer prices while collectively reporting $24.6 billion in increased profits during their most recent fiscal years. These same companies also ramped up spending on shareholder handouts by nearly $45 billion year-over-year for a total of $79.1 billion.”

FREDppi

This is while wholesale PPI price inflation for the raw materials that go into retail products is close to zero. The PPI approached zero percent in June 2023 and has remained below 2 percent annually since then. Supply may become oversupply, in other words, continuing to bring down wholesale prices.

This is opposed to the most recent Consumer Price Index of retail prices that is still hot, with annual inflation rate up slightly from 3.1 to 3.2 percent in February, and core inflation with food and energy prices now 3.8 percent.

It highlights the chasm between wholesale and retail prices that must factor in labor and capital costs. But those costs remain largely constant, so much of the difference must come from higher profit margins of retailers.

Voices are now growing louder for an earlier rate cut than in June that markets have currently predicted, in part because retail sales are faltering. Retail sales rose 0.6% in February from the previous month, according to Census Bureau data, but January retail sales previously posted a surprise -1.1% decrease. They have been trending downward since September 2023.

FREDretailsales

Retail inflation is largely due to corporate greed, which is out of the Fed’s control.

So there are now voices saying the Fed should pay less attention to its target rate of 2 percent and reduce interest rates sooner. “Given that the labor market is tight, the economy is running well and corporate fundamentals are looking pretty good, I’m not sure we need 2% inflation,” said another economist in a MarketWatch interview.

The chorus for rate cuts will grow louder as further weaknesses in retail sales appear in coming months.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Consumers Confident No Recession

Financial FAQs

There is a good reason why we have avoided a recession. Consumers don’t believe it will happen. And consumers drive some 70 percent of US economic activity. So their attitudes tend to make or break economic growth. When they decide conditions are worsening, they save more and spend less.

But that isn’t happening today. Consumers continue to spend into the New Year, and surveys that measure their attitudes show they feel good enough to continue to spend.

I like the Conference Board’s confidence survey that states, it “…reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates.”

And this is also reflected in their “perceived likelihood” that a recession is less likely this year.

Conference Board

“February’s write-in responses revealed that while overall inflation remained the main preoccupation of consumers, they are now a bit less concerned about food and gas prices, which have eased in recent months. But they are more concerned about the labor market situation and the US political environment,” said its Chief Economist Dana Peterson.

Their main concern seems caused by the primary elections and sloganeering that goes with the election season. But consumers are beginning to realize they have benefited from the record number of jobs created over the past two years.

Consumer spending is the main reason growth has been so strong. Spending was revised upward from 2.8 percent to 3 percent annually in last week’s Personal Consumption Expenditure survey.

The University of Michigan’s sentiment survey also followed by economists (and pundits) is even more upbeat.

Survey Director Joanne Hsu commented, “Consumer sentiment moved sideways this month, slipping just two index points below January and holding the gains in sentiment seen over the past three months. Expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long-run expectations 46% above November 2023 readings.”

Consumers seem to remain one step ahead of the pundits and pay less attention to the headlines and hysteria generated by mass media and more attention to their personal financial wellbeing.

This is a heartening sign that facts can win over fiction and consumers will keep the post-pandemic recovery alive.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen 

It's A Soft Landing

 Popular Economics Weekly

A terrific February employment report is further evidence the US economy has made a soft landing.

FREDemployment

Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate ticked up slightly to 3.9 percent from 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Education and Health created 85,000 new jobs, Leisure & Hospitality 58,000, and Government 52,000 more jobs. Construction, Retail trade, and Transportation- warehousing created another 62,000 jobs in February.

What does this really mean? That employment and economic growth have stabilized in a very good place, with more good new jobs created, the unemployment rate still below 4 percent and average hourly ages rising faster than inflation.

American consumers and Fed officials can breathe easier this year, and the Fed can begin to lower interest rates to hedge against the damage from future shocks to the economy, rather than worry about higher inflation ahead (i.e., the danger of deflation rather than inflation).

Former St Louis Fed President James Bullard believes Chairman Powell’s Fed will now lower interest rates sooner. Otherwise the Fed may get behind on rate cuts if the economy normalizes over the second half of the year, he said in an interview with MarketWatch’s Greg Robb. It would be awkward for the Fed to have inflation close to 2% with the Fed’s benchmark policy rate in the range of 5.25%-5.5%, Bullard said.

This is while “The price index for gross domestic purchases (GDP) increased 1.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter. The personal consumption expenditures (PCE) price index increased 1.7 percent, compared with an increase of 2.6 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, the same change as the third quarter.”

Why has inflation fallen so dramatically? I’ve been saying there are a number of reasons, beginning with the fact that the supply chain of goods and services has caught up to the demand by consumers and companies after the pandemic. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply, largely because of new technologies such as AI, which has stream-lined supply chains and shortened delivery times.

FREDlaborproductivity

The productivity of American workers rose at a 3.2 percent annual rate in the fourth quarter. Year over year, productivity has increased by a revised 2.6 percent. That’s the largest increase since the first quarter of 2021.

This will keep inflation low for the rest of this year, maybe too low if the Fed doesn’t listen to Bullard, and the unemployment rate continues to tick higher in months ahead.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

More Jobs in Year Ahead?

 Financial FAQs

The US economy hasn’t slowed. Fourth quarter Gross Domestic Product (GDP) growth was revised downward from 3.3 percent to 3.2 percent in the second estimate, and predictions for first quarter 2024 GDP growth are hovering between 2-3 percent.

The focus now shifts to Friday’s upcoming unemployment report. Today’s Job Openings and Labor Turnover Survey (JOLTS) will help to predict the jobs picture. The JOLTS report is holding at 8.9 million job openings, same as last month, so Friday’s unemployment rate should remain at a very low 3.7 percent.

Calculated Risk’s wonderful graph gives us the best visual portrayal of monthly changes in job creation. The black line portrays job openings, dark blue line portrays hires, and red bars show total separations. Net job formation has been in a downward trend since the Fed began to raise interest rates.

“The number of job openings changed little at 8.9 million on the last business day of January, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.”

The difference between hires and job separations is closer to the actual number of new jobs created in February—400,000 in this case. But after seasonal adjustments that attempt to ascertain the increase over last year at this time, new nonfarm payrolls jobs should be around 200,000 in Friday’s report, a very strong jobs report.

Calculate Risk

It shows us why there has been a record number of jobs created over the past two years.

Consumer spending is the main reason growth has been so strong. It was revised upward from 2.8 percent to 3 percent annually in last week’s Personal Consumption Expenditure’s report.

Inflation has been tamed as well. The personal consumption expenditures (PCE) price index increased just 1.8 percent, an upward revision of 0.1 percentage point. Excluding food and energy prices, the PCE price index increased 2.1 percent, an upward revision of 0.1 percentage point.

So why is the Fed waiting any longer to drop interest rates? They seem to be wanting consumers to spend less. Yet regional banks that specialize in commercial loans have been hurting since commercial office vacancy rates have soared. They need lower interest rates so they can refinance all those commercial loans about to come due.

Fed Chair Powell in his latest congressional testimony, said "What we want is just more evidence that will give us more confidence that inflation is on a path down to 2% sustainably."

But annual inflation is already below 2 percent with the PCE and wholesale Producer Price Indexes. What more evidence do they need?

The Fed is again playing its historical role of being the last to react to changing economic conditions—in this case the possibility of more bank failures if they don’t begin to lower short term interest rates soon.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Inflation Is Going Nowhere

 Popular Economics Weekly

I said recently that the US economy has made a soft landing. Here is further proof with the release of the government’s Personal Consumption Expenditure Index (PCE) that measures consumer spending.

Inflation has flattened and been stuck close to the Fed’s 2% target rate for months. This has reassured consumers enough as measured by consumer sentiment surveys that they have kept up their spending patterns, giving a boost to strong first quarter growth.

The January PCE price index increased 2.4 percent year-over-year (YoY), down from 2.6 percent YoY in December, and down from the recent peak of 7.1 percent in June 2022.

The PCE price index, excluding food and energy, increased 2.8 percent YoY, down from 2.9 percent in December, and down from the recent peak of 5.6 percent in February 2022.

FRED/CalculatedRisk

And the 6-month index PCE Price Index is up 2.5%, Core PCE Prices: 2.5%
Core minus Housing: 1.8%. That means inflation will probably remain stuck somewhere between 2 to 2.5% for the foreseeable future.

American workers are fully employed, and wages are rising slightly faster than inflation. Next week’s release of the monthly unemployment report should confirm nothing has changed.

This is why consumers remain optimistic, per the University of Michigan’s consumer sentiment survey:

“Consumer sentiment moved sideways this month, slipping just two index points below January and holding the gains in sentiment seen over the past three months,” said survey director Joanne Hsu. “Expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long-run expectations 46% above November 2023 readings.”

This should also answer the question why fourth quarter 2023 GDP growth was holding at 3.2 percent in its second reading.

The price index for gross domestic purchases (GDP) increased (just) 1.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter. The personal consumption expenditures (PCE) price index increased 1.7 percent, compared with an increase of 2.6 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, the same change as the third quarter.

Inflation has fallen dramatically, in other words. The supply chain of goods and services has caught up to demand. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply in the last 12 months.

And, though I’m repeating myself, health care spending is soaring, as a record 21.3 million people have officially signed up for healthcare insurance through the HealthCare.gov Marketplace for 2024, marking a third consecutive banner year for the program.

HHS Secretary Xavier Becerra said, “Once again, a record-breaking number of Americans have signed up for affordable health care coverage through the Affordable Care Act’s Marketplace, and now they and their families have the peace of mind that comes with coverage.”

So, I would add another reason for the improving mood of consumers: a healthier workforce is a more productive workforce.

Maybe economic stability at home is what we need with the rest of the world in turmoil.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen