Weekly Economic Trends and Indicators
As we pointed out last week, inflation continues to be the most pressing issue for economic policymakers right now. The lack of progress on inflation is beginning to have a significant impact on the market’s expectations of interest rate cuts from the Fed this year. The combination of inflation and higher interest rates for longer increases the vulnerability of the economy to external shocks stemming from geopolitical events, the domestic election cycle, oil prices and other factors that are difficult to predict.
On Tuesday of last week, Jerome Powell, Chair of the Federal Reserve Board, said “More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal.” Later he also said, “We can maintain the current level of restriction for as long as needed.” These comments were not a total surprise, as he had made similar remarks on April 3. However, in light of the surprisingly high March CPI data, his words took on new significance, pushing bond yields higher and sending the stock market down.
Powell was not the only Fed official to make such pointed remarks. Several others spoke on the stubbornness of inflation, including Chicago Fed president Austan Goolsbee, who recently said, “That leaves the main short-run problem as I see it, which is persistently high housing inflation—still much higher than it was pre-pandemic. Looking at market data on rents for new leases, I’d say housing inflation is supposed to have been falling. If it doesn’t, it will be hard to see a smooth path back to our 2% inflation goal.”
Some commentators have even started to opine that a rate increase could be on the table. While nothing in Chair Powell’s remarks would suggest that as a serious possibility, last week’s Fed speakers all seemed to be singing from the same songbook. “Higher for longer” is the message. Chances of a rate cut in May are almost nil, and even the summer is looking less likely by the day. The dominant sentiment now is looking at September as the most likely month for the first rate cut, with some probability of it being slightly earlier or later.
The next data points to watch are GDP and Personal Consumption Expenditure (PCE) inflation this week and the labor market report next week. The Atlanta Fed GDPNow model estimate of GDP growth for the first quarter was revised to 2.9% last week, up from 2.4% the previous week, which suggests that the economy is not ready to slow down yet.
Interest-sensitive sectors such as manufacturing continue to be plagued by high rates and the related problem of the dollar’s strength on the world market (still near decade-high levels). Yet the consumer is still strong as evidenced by the GDP forecast as well as other data. Aside from inflation, the most concerning risk to the economy would be something unexpected that could upset consumer spending, such as turmoil in the Middle East that spikes oil prices. The market’s quick reaction to recent tensions between Israel and Iran illustrate this concern. In summary, the overall economy remains strong, but stubborn inflation adds risks that should not be ignored.
Next week: 1st quarter GDP and a focus on small businesses
