Weekly Economic Trends and Indicators
The Headline:
On Thursday, the Bureau of Economic Analysis (BEA) reported that U.S. real gross domestic product (GDP) increased by 3.3 percent (seasonally adjusted annual rate) in the 4th quarter of 2023. Most analysts expected about a 2 percent increase. The final Atlanta Fed GDPNow forecast was 2.4 percent.
On Friday, the BEA reported that the personal consumption expenditures (PCE) deflator rose 0.2 percent in December, resulting in 2.6 percent PCE inflation over the last twelve months.
The Details:
Personal consumption expenditures accounted for over half of the growth (growing at an annual rate of 2.8 percent). Export growth and state and local government were also large contributors. Private inventory growth slowed significantly which acted as a drag on growth.
The Context:
These are the last major pieces of economic data released before the Federal Reserve’s open market committee meeting this week. The news had essentially no effect on expectations for next week’s meeting. Virtually no one expects any movement in the fed funds target at this meeting. However, the strength of this week’s data on GDP and inflation had a marginal effect on expectations for the rest of the year.
For example, according to the CME FedWatch Tool, the expectations of a 75 basis point reduction in the fed funds target by June decreased from 39.7 percent on January 19 to 35.4 percent on Friday afternoon. The probabilities of only a 25 to 50 basis point reduction by June increased accordingly. While this is a very small change, the market may be waiting until the press conference after Wednesday’s meeting to decide whether this data really means rates will be higher for longer.
The very small change in probabilities also highlights the fact that many analysts truly believe that monetary policy is now too restrictive—even with the economic strength we are seeing. They would point to the fact that with inflation coming down (twelve-month PCE now down to 2.6 percent), the real fed funds rate (market rate minus inflation) is now approaching 3 percent and rising as inflation falls further. The argument is that the Fed must cut rates proactively before the high real rates cause the economy to weaken. There is too much risk that high rates will stifle business investment and consumer spending. The slowdown in manufacturing which we have been tracking and the corroborating slowing of private inventory growth in the 4th quarter would support this view.
The press conference after the Fed meeting on Wednesday will be key to understanding whether Fed’s stance has changed as a result of recent economic strength. Analysts will be looking to Chair Jerome Powell’s words to see if he pushes back against the market’s expectations of a move in March.
Next week: Local and national employment report
