Tuesday, February 6, 2024

Soft Landing, What's Next?

 The Mortgage Corner

The US economy has landed with the huge Q4 GDP growth spurt of 3.3 percent, 335,000 nonfarm payroll jobs created, and inflation closing in on the Fed's 2% target rate. What happens next? It looks like it’s about to take off again, if Powell’s Fed Governors allow it to happen.

Today’s Institute of Supply Manager’s survey of the service sector shows an economy picking up speed in the New Year. Economic activity in the services sector expanded in January for the 13th consecutive month as the Services PMI® registered 53.4 percent. The sector has grown in 43 of the last 44 months, with the lone contraction in December 2022.

“The overall growth rate increase in January is attributable to faster growth of the New Orders, Employment, and Supplier Deliveries indexes,” said Anthony Nieves, survey Director. ‘The majority of respondents indicate that business is steady. They are optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures and ongoing geopolitical conflicts.”

The manufacturing sector also improved slightly in January, though still in contraction. Its manufacturing index (PMI) rose 2 pts to 49.1, with new orders showing the biggest jump.

There are many reasons for the stronger growth in 2023 and its continuing possibility in 2024. We jump started the US economy more quickly than in other developed countries, in part by putting so much cash in the pockets of consumers and businesses, so that consumers have kept spending.

BEApcexpenditures

Personal consumption expenditures (PCE) are portrayed in the above BEA graph. The higher orange line is outlays (i.e., increased spending) and shorter blue bar Disposable Income (after taxes, etc.).

Service-sector spending is especially strong and has increased in the latest BEA estimate. This is the major reason the US economy continues to expand.

The BEA said the largest contributors to the increase were financial services and insurance (led by portfolio management and investment advice services), health care (both hospitals and outpatient services), and recreation services (led by gambling).

Now a first look at 2024 is the Atlanta Fed’s GDPNow estimate of first quarter GDP confirms continuing recovery with a huge revision to its first quarter estimate.

AtlantaFed

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 4.2 percent on February 1, up from 3.0 percent on January 26. After this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management...”

The Atlanta Fed’s estimate of future GDP growth has been surprisingly accurate, and more positive than that of most Blue-Chip economists surveyed I’ve said before.

Such continued growth is fortunate for consumers without job worries, but maybe not financial markets that rely heavily on borrowed money.

If the Fed now becomes more hawkish about future inflation, and backs off on the timing of rate cuts, it could hurt more vulnerable regional banks (as happened last year) that are now worried interest rates may remain too high for too long.

Harlan Green © 2024

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

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