There is a new idea embraced by economists that the US economy avoids a downturn entirely and hums along with the labor market intact and inflation under control. In recent days, better-than-expected reports on the labor market, retail sales, and even the housing market have bolstered the positivity of optimists. However, some data show that inflation is sticking around longer than expected, and pricing pressures remain even as the Federal Reserve promises more pain in the form of interest rate hikes. The current economy is doing better than was predicted at the end of last year. The widely followed GDP Now model from the Federal Reserve Bank of Atlanta predicts that the U.S. economy will grow at an annual rate of 2.5% in the first quarter, an increase from 0.7% in late January. In some ways, the more optimistic thinking comes amid a series of potentially negative economic readings. Inflation rose 0.5% from December to January, but the yearly rate fell for the seventh consecutive month. Bond yields have risen, with short-term Treasuries now yielding more than 5% for the first time since 2007 as markets price in higher Fed interest rates. This is interpreted as a belief that the Fed will be able to control inflation, even if it will take a little longer. The housing market is still under extreme pressure from rising mortgage rates, but builders were more confident in February, according to the National Association of Homebuilders, with sentiment reaching its highest level in ten months. According to the builder survey, the percentage of builders offering discounts or other incentives to entice buyers has decreased: In February, 31% of builders reduced home prices, compared to 35% in December and 36% in November; average price cuts in February were 6%, compared to 8% in December. Then there's the labor market to consider. The unemployment rate is 3.4%, wages have been rising, albeit not as quickly as inflation, and the number of available jobs actually increased in the most recent reading. Meanwhile, Social Security recipients saw their payments rise 8.7% in January as a result of the 2022 inflation rate. That brings us back to the Fed. The central bank is committed to returning inflation to its 2% annual target, a figure that is still well below half or more of current levels depending on the measure used. Consumers account for nearly 70% of the economy. With so many jobs available, consumers may be able to keep the economy running for longer than expected. Of course, Fed rate hikes have a lag effect, and those big hikes in 2022 may bite harder and derail the economy six months from now.
1 comment:
I find it misleading that the news is being super positive about the U.S. economy. It feels almost like a dead cat bounce as markets are mainly getting pumped due to people not being able to restrain themselves from spending. Financial markets will fully endure the effects of mass layoffs nationwide, and when that does happen I see markets going back to falling due to production halting. I also think the U.S. economy hasn't really taken in the amount of money pumped into markets through spending bills, and stimulus checks during COVID. The U.S. printed more than 35% of our circulating supply of dollars, which is just asking for prices to balloon. To add to that, our currency has no regulations or asset backing it which allows the FED to just print out loans out of thin air. Overall, I do not see the economy improving this year due to our weak currency and inability to limit consumption.
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