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.
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
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