The latest economic data show the US economy slowed in Q1 2024, but economic growth should increase in the second quarter because consumers will continue to spend.
Personal Consumption Expenditures (PCE), the best measure of overall consumer spending, fell slightly to a 2.7 percent annual rate in April but is still higher than pre-pandemic levels.
This is apparently still too high for Fed officials, who believe PCE must come down to pre-pandemic levels of approximately 2 percent to bring down inflation to its 2 percent target rate. But that pre-pandemic inflation rate held for almost 10 years, so is that what Fed officials believe is a sustainable possibility?
The US economy was recovering from the Great recession then, which was a worldwide recession almost as damaging as the Great Depression of the 1930s. And the just-ended COVID-19 pandemic has been just as damaging, which is why the federal government came to the rescue so quickly with the various bipartisan legislation that is now being called Bidenomics.
The BEA graph shows both Disposable Personal Income (after taxes) and Outlays (the sum of PCE, personal interest payments, and personal current transfer payments) increased just 1 percent in April. The personal savings rate held at 3.6 percent.
And the second estimate of first quarter GDP growth was revised down to 1.3 percent from 1.6 percent. The decline in both PCE and Q1 economic growth has revived hopes in the financial sector that two or three rate cuts might still happen this year.
And another report, the JOLTS report that shows the number of job vacancies (i.e., unfilled job needs reported by businesses), dropped to 8.1 million openings. It is probably the most accurate predictor of future employment (or unemployment) since it measures a slightly lower demand for new jobs.
We therefore hope that Fed Chair Powell might continue to sound dovish about inflation prospects since the last FOMC meeting.
"I think it is unlikely that the next rate move would be a hike,” Powell recently said. “The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.”
The US economy is still moving towards the Fed’s desired goal of slightly higher unemployment and lower inflation, in other words, which economists are saying was the ‘goldilocks’ condition of the last decade before the pandemic—not too hot (inflation) nor too cold (employment).
Q2 growth estimates have been declining lately. The Atlanta Fed just revised their GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 to 2.7 percent on May 31, down from 3.5 percent on May 24. It was mainly after a decrease in the nowcast of the second-quarter real personal consumption expenditures (PCE)growth that was reported above.
So there is little consensus on what Q2 growth from April to June may look like. The battle over what is acceptable inflation is between businesses and retailers, I said recently. The Atlanta Fed reported in a recent survey that consumer prices are rising faster than business costs because retailers must add in the costs of distribution and profits to their prices.
And consumers are finally reacting to the higher retail prices, which has the likes of Target and Walmart finally cutting prices. This should start a trend of lower retail prices matching more closely to the wholesale costs businesses must cover.
But the real problem is that the Fed’s reluctance to drop their rates has hurt manufacturing, which continues to contract. The Institute for Supply Managers (ISM) manufacturing index contracted again, just when it is most needed to rebuild our infrastructure, the 18th time in the last 19 months, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.
“The Manufacturing PMI® registered 48.7 percent in May, down 0.5 percentage point from the 49.2 percent recorded in April. The overall economy continued in expansion for the 49th month after one month of contraction in April 2020. (A Manufacturing PMI® above 42.5 percent, over a period, generally indicates an expansion of the overall economy.)”
So we hope the Fed may not be tempted to try for an unattainable goal; a decade-long inflation rate that prevailed prior to the pandemic when higher economic growth is more important than ever to modernize the American economy.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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