America’s Frustrating Search for a Soft Economic Landing by Michael R. Strain

The first quarter GDP report supports the view that the US economy has not fallen. While some economists worry about stagflation, the real concern is that taming price pressures may require a moderate decline, given strong consumer spending and insufficiently restrictive monetary policy.

Washington, DC – in First quarter of 2024The gross domestic product in the United States recorded annual growth of 1.6% – nearly one percentage point Slower than expected. Meanwhile, core inflation remained higher than expected, with consumer prices (excluding energy and food) rising at an annual rate of 3.7%An increase from 2% in the fourth quarter of 2023.

At the time of writing, Stock prices They fall and Bond yields They are riding on expectations that the US Federal Reserve will cut interest rates just once in 2024. This represents a notable shift from the end of 2023, when markets expected the Fed to cut interest rates. Six times In 2024. During the first quarter of this year, investors reduced their bets on interest rate cuts to make room for the view that strong growth and firmer inflation will persist. Now there is evidence of slowing growth and rising inflation, a combination that has stimulated some Investors And Analysts to Warns of stagflation.

How should we connect the dots? Is the US economy still thriving? Or should we be concerned about a period of slow growth and high inflation?

First, look at headline GDP growth and you will see that the economy was actually strong in the first quarter of this year. Various volatile factors led to the decline in the headline number: Imports Outperforming exports, change in inventories compared to the previous quarter, and a smaller increase in government spending compared to last year.

But the core of the American economy is… Consumer expenses, which has been above the pre-pandemic trend since 2021, and by my calculations, was about 1% higher in the last quarter than pre-pandemic forecasts indicate. On an annual basis, real consumer spending grew at an annual rate of 2.4% in the fourth quarter Don’t go down.

Strong overall consumer spending is due in part to increases in wealth outweighing the impact of higher interest rates. Since the Federal Reserve’s interest rate setting committee he met In November, the S&P 500 rose 20%. Furthermore it, Home values ​​rise -And many homeowners feel like they’ve won the lottery by securing low prices Mortgage rates Before 2022 – provides an additional payment.

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Elastic household spending slows down the rebalancing process between labor demand and labor supply. And in the first quarter of 2024, there was 1.4 Vacancies For every unemployed worker, and Unemployment rate It was less than 4%. A tight labor market is leading to rapid wage growth: wages rose at high rates in the last quarter conflict With the inflation target set by the Federal Reserve at 2%. This data supports the view that the economy is stronger than the headline GDP growth rate suggests.

How can financial conditions be so loose, consumer spending so buoyant, and the labor market so tight when the global economy is headed toward recession? Federal funds rate Has it been higher than 5% in the past 12 months?

This is less of a mystery than meets the eye. If we look at it on a longer scale, it turns out that high interest rates have slowed the economy. The Federal Reserve started raising interest rates 25 months ago. In 2021, the economy was adding about 600,000 Net new jobs Per month; It falls to 400,000 in 2022, and further to about 225,000 in 2023. Likewise, core inflation has fallen from about 5.5% in early 2022 to about 3% today.

But while the 5.3% federal funds rate is enough to cool the economy from its overheated state in 2022, it likely won’t be as restrictive as many economists believe or as it was before the pandemic. Although members of the Federal Reserve’s interest rate setting committee believe that the so-called “Neutral rate“At close to 2.6% – about half the current interest rate – it has almost certainly risen, perhaps by a large margin. This implies that monetary policy is less restrictive than it might appear.”

as I am books In early March, the economy did not decline. The first quarter GDP report, which shows that consumer spending has remained strong, supports this view. Moreover, a soft landing, while still possible, was never likely, and looks increasingly unlikely. The Fed will have to keep interest rates high for longer; Her first cut probably won’t come until November at the earliest.

Although current interest rates are not restrictive enough to quickly push core inflation to the Fed’s target, they are high enough to cause cracks in the economy. Credit card defaults for low-income borrowers are high and to riseThe annual growth in orders for basic capital goods is close 0%.

As the economy returns to normal after the pandemic, standard economic relationships are beginning to reassert themselves. This means that beating inflation will likely require an interest rate increase Unemployment ratewhich is already about 40 basis points higher than its post-pandemic low.

The underlying economy is booming, and monetary policy is insufficiently constrained. The possibility that taming price pressures will require a slight pullback is more worrying than stagflation.

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