The path to a “soft landing” no longer seems to be as smooth as it was four months ago. But the expectations of a year ago have been exceeded.
April 13, 2024
The economic news of the past two weeks has been enough to confuse even seasoned observers. The unemployment rate fell. Inflation rose. The stock market crashed, then recovered, then fell again.
However, if you step back, the image becomes sharper.
Compared to the outlook in December, when the economy appeared to be on track for a surprisingly gentle “soft landing,” the latest news has been disappointing. Inflation has proven more stubborn than hoped. Interest rates are expected to remain at their current levels, the highest in decades, at least through the summer, if not next year.
However, if you move the point of comparison back a bit to the beginning of last year, the story changes. At the time, forecasters largely predicted a recession, convinced that the Federal Reserve’s efforts to curb inflation would inevitably lead to job losses, bankruptcies and foreclosures. And yet, despite the recent hiccups, inflation has cooled considerably while the rest of the economy has so far escaped significant damage.
“It seems rude to complain about where we are right now,” said Wendy Edelberg, director of the Hamilton Project, an economic policy division of the Brookings Institution. “This has been a truly remarkably painless slowdown considering what we have all been worried about.”
The monthly fluctuations in consumer prices, employment growth and other indicators are of great importance to investors, for whom every hundredth of a percentage point of Treasury yields can affect billions of dollars in transactions.
But for pretty much everyone else, it depends on the slightly longer deadline. And from this perspective, the economic outlook has changed in subtle but important ways.
Inflation persists stubbornly and is not increasing.
Inflation, measured by the 12-month change in the consumer price index, peaked at just over 9 percent in the summer of 2022. The rate then fell sharply for a year before stagnating at around 3.5 percent in recent months. An alternative measure favored by the Fed shows lower inflation – 2.5 percent in the most recent data from February – but a similar overall trend.
In other words, progress has slowed, but it has not reversed.
On a monthly basis, inflation has increased slightly since the end of last year. And prices continue to rise rapidly in certain categories and for certain consumers. Car owners, for example, are affected by a triple problem: higher gasoline prices, higher repair costs and, above all, higher insurance premiums, which have risen by 22 percent in the past year.
But inflation continues to fall in many other areas. Food prices have been stagnating for two months and have only increased by 1.2 percent over the past year. Prices for furniture, household appliances and many other durable goods have fallen. Rent increases have moderated or even reversed in many markets, although this has been slow to be reflected in official inflation data.
“Inflation is still too high, but inflation is much less broad than in 2022,” said Ernie Tedeschi, a research scholar at Yale Law School who recently left his post in the Biden administration.
The rest of the economy is doing well.
The recent slowdown in inflation would be a major concern if it were accompanied by rising unemployment or other signs of economic distress. That would put policymakers in a bind: if they try to stimulate the recovery, they risk adding fuel to the inflation fire; If they continue to try to curb inflation, they could plunge the economy into recession.
But that is not the case. Inflation aside, most recent economic news has been reassuring, if not downright rosy.
The labor market continues to exceed expectations. Employers added more than 300,000 jobs in March and added nearly three million last year. The unemployment rate has remained below 4 percent for more than two years, the longest such period since the 1960s, and layoffs remain historically low despite cutbacks at some big-name companies.
Wages are still rising — no longer at the breakneck pace they were at the start of the recovery, but at a rate closer to what economists consider sustainable and, crucially, faster than inflation.
Rising incomes have allowed Americans to continue spending even as savings accumulated during the pandemic have declined. Restaurants and hotels are still full. Retailers have had a record-breaking holiday season and many are predicting growth this year too. Consumer spending helped accelerate overall economic growth in the second half of last year and looks set to continue growing, albeit more slowly, in the first quarter of 2024.
At the same time, sectors of the economy that struggled last year are showing signs of recovery. The construction of single-family homes has picked up speed in recent months. Manufacturers are reporting more new orders and factory construction has surged, in part because of federal investment in the semiconductor industry.
Interest rates will remain high for a while.
So inflation is too high, unemployment is low and growth is solid. With these ingredients, the standard political cookbook offers a simple recipe: high interest rates.
In fact, Fed officials have signaled that rate cuts that investors once expected earlier this year will now likely wait until at least the summer. Michelle Bowman, a Fed governor, has even suggested that the central bank’s next move could be to raise interest rates, not lower them.
Investor expectations for lower interest rates were a major factor in the rise in stock prices in late 2023 and early 2024. That rally has lost momentum as the outlook for rate cuts has grown bleaker and further delays could spell trouble for equity investors. Major stock indexes fell sharply on Wednesday following the hotter-than-expected consumer price index report; The S&P 500 ended the week down 1.6 percent, its worst week of the year.
Meanwhile, borrowers will have to wait for relief from high interest rates. Mortgage rates fell late last year in anticipation of rate cuts but have since risen, exacerbating the existing housing affordability crisis. Interest rates on credit cards and auto loans are at their highest in decades, making it particularly hard for lower-income Americans who are more likely to rely on such loans.
There are signs that higher borrowing costs are starting to take their toll: Default rates have risen, particularly among younger borrowers.
“There is cause for concern,” said Karen Dynan, a Harvard economist who served at the Treasury Department under President Barack Obama. “We see that there are parts of the population that are under pressure for one reason or another.”
Overall, however, the economy has withstood the harsh medicine of higher interest rates. The number of consumer bankruptcies and foreclosures has not skyrocketed. There were no business failures either. The financial system has not collapsed, as some feared.
“What should keep us up at night is when we see the economy slowing but inflation numbers not letting up,” said Ms. Edelberg of the Hamilton Project. However, so far this has not happened. “We just still have really strong demand and we just need monetary policy to be tighter for longer.”
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2024-04-13 09:04:59
www.nytimes.com
