Weekly Economic Trends and Indicators

This week marks the beginning of the second half of 2024, so it makes sense to look back at how the national and local economies have fared compared to expectations at the start of the year. This is also a good time to look ahead to what the rest of the year may bring.

The year started on a very positive note with significant inflation reduction and a robust labor market. The recession that many had predicted for 2023 had not materialized. The Federal Reserve had raised short-term interest rates quite aggressively during the first half of 2023 but had been holding steady for several months. Many believed that inflation would continue to fall, labor market growth would slow to a more sustainable level, and the Fed could start easing sometime around the middle of 2024. A “soft landing” without a recession seemed achievable.

However, even six months ago, there were symptoms of an economy that might be slowing more than we would like. Back in January, I pointed out that the high interest rates and strong dollar were having a negative effect on manufacturing. For this reason, the Quad Cities regional economy, which is more concentrated in manufacturing than the rest of the country, may slow down more than the national economy does. Complicating matters further, agricultural prices, primarily corn and soybeans, have drifted down from their cyclically high levels.

Over the last six months, progress on inflation reduction stalled with 12-month CPI inflation still running over 3% and 12-month PCE inflation over 2.5%. As a result, the Fed has left the fed funds rate at the same target level (5.25 to 5.50%) since last July. However, in recent weeks this situation has been improving. Inflation in the Midwest region has averaged 2.7% over the last 12 months compared to 3.3% for the entire country. Because inflation has fallen more in the Midwest, the higher interest rates are hitting the region with more force.

The Atlanta Fed’s GDPNow forecasting model is now predicting 1.7% real GDP growth in the U.S. for the quarter just ended (slightly under the long-run average), compared to their prediction of 2.2% a week ago. However, the growth number for the Midwest is almost certainly a little lower than that.

The slower progress on inflation was not entirely unexpected, however, because the inflation reduction of 2023 was so unexpectedly rapid that no one should have expected that pace to continue for too long. The more optimistic expectations of a Fed interest rate cut by summer were wrong, but probably not by much. Currently, the market expects a rate cut in September, and provided there are no adverse surprises in inflation, this will probably come to pass.

This could not come too soon for Midwest regional economies, including ours, which are facing a unique set of headwinds consisting of lower commodity prices, inflation lower than the national average and slowing labor markets. If the Fed cuts rates in September, and then once more before the end of the year, as many expect, it would give a boost to consumer spending which could keep the “soft landing” scenario in play, but the overall outlook is less certain now than it was in January.

Next week: U.S. employment report