AMSCI NEWSLETTER June 2024

The combination of elevated inflation and a strong labor market continue to push lower interest rates further away.

Prices in April were 3.4 percent higher than a year earlier and were up 0.3 percent from the previous month, according to the Bureau of Labor Statistics. About 70 percent of the monthly increase resulted from shelter and gasoline costs.

After the annualized inflation rate reached 9.1 percent in June 2022, it fell each month for a year before bottoming out at 3 percent in June 2023. Since then, inflation has fluctuated between that level and 3.7 percent.

Some analysts are pointing to a recent slowdown in personal spending – which grew 0.2 percent from March to April following back-to-back months at 0.7 percent – as an indication that inflation rates might soon dip below 3 percent.

“People have been pinched for a while, and it’s likely starting to show,” a senior economist at NerdWallet told Reuters, adding, “This cooling is encouraging for slower inflation in the coming months.”

This data point, however, has varied significantly from month to month during the past year and was at 0.1 percent in January before the two straight months of 0.7 percent increases.

Consumer spending accounts for more than two-thirds of economic growth, so reductions here could make a recession more probable. Concerns about the overall health of the economy, though, are assuaged on a monthly basis by another report from the Bureau of Labor Statistics that regularly shows strong job creation and a low unemployment rate. In May, the economy exceeded expectations by creating 272,000 jobs, including 68,000 jobs in health care and more than 40,000 in both government and hospitality.

Wage increases were also higher than expected, growing 0.4 percent from April and 4.1 percent from May 2023. While economic growth in the first quarter of the year was just 1.3 percent, the employment and wage numbers, many analysts say, are likely enough to convince the Federal Reserve to keep waiting before reducing interest rates.

“Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut,” the chief global strategist at Principal Asset Management said, according to CNBC. “Not only has jobs growth exploded again, but wage growth has also surprised to the upside, both moving in the opposite direction to what the Fed needs to begin easing policy.”

The target range for the Federal Reserve’s Federal Funds Rate has been 5.25 to 5.5 percent since July 2023. The last time the Fed reduced rates was in March 2020 in response to the economic emergency created by the Covid-19 pandemic. The target range was 0 to 0.25 percent for the next two years, until concerns about inflation led to a series of hikes over the following 16 months.

During the rest of 2024, the Federal Reserve Federal Open Market Committee is scheduled to meet on June 11-12, July 30-31, Sept. 17-18, Nov. 6-7, and Dec. 17-18. Investor’s Business Daily on June 9 reported that, given recent economic data, “there is essentially no chance of a Fed rate cut” in June. The publication allowed for a very small chance in July and called September “a toss-up,” noting that, “Investors see a 50.5% chance of a quarter-point rate cut” at that meeting. Reductions are seen as much more likely than not in November and December. However, rate cuts this spring and summer were once seen as near certainties before prices stayed high.

The Federal Reserve’s target inflation rate is 2 percent and, following its April 30-May 1 meeting, it noted that, “Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”

At the same time, the central bank has not faced pressures to spur the economy through lower rates because “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low.” As a result, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

The inflation and labor market data that have been released since that meeting seem unlikely to change the Fed’s approach.

Consumer confidence increased in May for the first time in four months, according to The Conference Board, but the organization cautioned that “Consumers remain anxious about the future.”

The board’s Consumer Confidence Index went up by 4.6 percent, with the group’s chief economist noting that “the strong labor market continued to bolster consumers’ overall assessment of the present situation,” but concerns about inflation remain.

“Consumers cited prices, especially for food and groceries, as having the greatest impact on their view of the U.S. economy,” the chief economist added. “The survey also revealed a possible resurgence in recession concerns.”

Another measure of consumer attitudes dipped sharply from April to May. The Index of Consumer Sentiment from the University of Michigan Surveys of Consumers fell by 10.5 percent month to month, though it was still more than 17 percent higher than in May 2023.

The surveys’ director said that consumers “expect unemployment rates to rise and income growth to slow.”

“The prospect of continued high interest rates also weighed down consumer views,” the director added. “These deteriorating expectations suggest that multiple factors pose downside risk for consumer spending.”

Housing starts increased by 11 percent from March to April but were slightly below the total in April of last year, according to the Census Bureau and the Department of Housing and Urban Development.

Existing home sales decreased by 1.9 percent from March to April, while the median sales price for existing homes increased by 5.7 percent year over year to $407,600, the National Association of Realtors reported.

“Home prices reaching a record high for the month of April is very good news for homeowners,” the association’s chief economist said. “However, the pace of price increases should taper off since more housing inventory is becoming available.”

The Dow Jones Industrial Average closed at 38,798.99 on June 7 for a year-to-date gain of just under 3 percent. The S&P 500 Index ended the day at 5,346.99, up more than 12 percent on the year.

The dollar on June 7 was trading at 0.93 euros, 0.79 pounds, 156.61 yen and 7.25 yuan.

With less than five months to go until the presidential election, the economy is sure to have a key role in the campaign. Even with all of the objective data that is available, views on the health of the economy, as is often the case, diverge along party lines. The Guardian reported that a Harris poll conducted in May found that 67 percent of Republicans incorrectly believe that the economy is in a recession, compared to 49 percent of Democrats who think that and 53 percent of independents. “The survey continued a trend of Republicans reporting higher levels of pessimism about the nation’s finances since Biden took office,” the publication stated. The saying that people vote with their pocketbooks may need to be revised to, people vote with their perception of their pocketbooks.