Martin Baccardax,
Whisper it quietly so as not to offend those who insisted the U.S. would be deep in an inflation-mired recession by now. But the Federal Reserve has likely delivered even more than the so-called soft landing its critics said was impossible.
The economy, it seems, isn’t ready to land at all.
Consumers might grumble about the high costs of food, shelter, and heat, and they’d be justified in doing so given the levels of headline inflation most have had to endure since the depths of the pandemic.
But they’re still working, and they’re still spending.
And that might be the most important factor for growth this year.
Economy grew well ahead of estimates
The Commerce Department reported Thursday that the economy grew at a 3.3% clip over the final three months of last year. That’s down from the 4.9% pace recorded over the third quarter but still an annualized rate that was well ahead of Wall Street’s 2% forecast.
Consumers powered the advance, the data indicated, as spending rose faster than income grew. Americans «continue to be increasingly willing to tap their savings streams or borrow more to support spending levels,» according to Mike Reynolds, vice president of investment strategy at Glenmede.
«This is likely unsustainable as savings and lending are finite and should not be able to prop up the consumer in perpetuity,» he warned.
Probably, but the near term looks solid. The GDP reading was also fortified by a big buildup in business inventories and a 1.9% jump in capital investment into things like equipment, structures, and intellectual property.
Companies wouldn’t be doing either if they didn’t think people would continue to buy stuff. And they certainly aren’t banking on growth from overseas, where Europe is flirting with recession, and China is in the midst of an economic meltdown that’s lopped more than $6 trillion from its stock market.
Inflation pressures were also easing, with the Fed’s preferred gauge, the core PCE Price Index (a much more reliable measure that adjusts for changes in spending habits) pegged at just 2% for the quarter.
We’re cleared for an economic nonlanding
That effectively means that inflation over the 2023 second half, based on the Fed’s measurement, hovered at around 2%, its preferred target, while GDP averaged an annualized growth rate of 4.1%.
Put simply, the economy is growing at twice the pace of inflation, the unemployment rate sits at the lowest levels in nearly four decades, and the S&P 500 is on pace for its fifth consecutive record close.
Housing is also on the mend, with new-home sales rising 8% last month to an annual rate of 664,000. The figure is powered in part by lower mortgage rates, which have triggered a big jump in new applications.
The 30-year mortgage rate was 6.69% on Jan. 25, down from 7.8% in October, according to Freddie Mac.
It’s worth noting, as well, that all this comes in the wake of the most aggressive Fed rate hikes in a generation. The central bank lifted its benchmark lending rates from nearly 0% in March 2022 to the current level of between 5.25% and 5.5%.
This is not the kind of backdrop consistent with a soft landing, a term used to describe an economy that sees slowing inflation and just enough growth to avoid recession.
Instead, it seems, the economy may not land at all.
The Atlanta Federal Reserve’s GDPNow forecasting tool, a real-time indicator of economic activity, suggests current-quarter growth of around 2.4%. But that tally was last updated on Jan. 19, around four days before S&P Global’s closely tracked PMI data for January.
The benchmark reading showed the fastest overall activity rate since June, with even the moribund manufacturing sector rising past the 50-point mark, which separates growth from contraction.
S&P Global’s Chris Williamson said the data suggest «an encouraging start to the year … with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures.»
He also echoed the forward-demand hints from today’s GDP data, adding that «new-orders inflows have now picked up for three months, buoyed in particular by improving sales to domestic customers, helping lift business confidence about the year ahead to the most optimistic since May 2022.»
Bill Adams, chief economist for Comerica Bank in Dallas, agrees, noting also that household incomes are outpacing inflation and a surge in domestic energy production is offsetting the impact of supply disruptions and geopolitical risks in the Middle East.
Gasoline prices, in fact, have fallen around 2 cents a gallon over the past month, according to data from the AAA Motor Club. That’s despite the rise in global crude prices tied to attacks on cargo ships in the Red Sea and OPEC’s ongoing production cuts.
No victory lap for the Fed just yet
Adams isn’t yet convinced that the Fed is ready to take a victory lap; however, he is arguing that Chairman Jerome Powell and his colleagues will want to «project an attitude of caution» after their two-day policy meeting in Washington next week.
«The Fed is still wary of the momentum that built up in price increases since the pandemic» and also wants to «limit increases of shelter costs after their post-2020 surge,» Adams said. «Equally important, the Fed is concerned that the U.S. economy’s solid wage growth could inflame wage-price pressures.»
Those are pretty good problems to have, however, when unemployment is holding at around 3.7% and more than 8 million positions at American companies remain unfilled, according to the November Jolts tally from the Labor Department.
Dan North, a senior economist with Allianz Trade Americas, puts it like this:
«The economy is knocking the blocks off the economists and always outperforming. Powell has got to have a smirk on his face today; he’s defying predictions with strong growth and inflation clearly coming under control.”
We’re not likely to see a smirk, but a wry smile of satisfaction from the Fed chair next week would be well-earned indeed.