AMSCI NEWSLETTER February 2024

The U.S. economy in the fourth quarter continued to shake off fears of a recession by growing at an annualized rate of 3.3 percent, according to the Bureau of Economic Analysis.

The bureau said that the expansion resulted from “increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential fixed investment.”

For all of 2023, the economy grew by 2.5 percent, with expansion significantly sharper in the last two quarters of the year (4.9 percent and 3.3 percent) than in the first two (2.2 percent and 2.1 percent).

BBC in February reported on how U.S. growth has been “outpacing all other advanced economies and [is] on track to do so again in 2024.”

“The US is holding up much better than other countries,” the news outlet quoted the chief U.S. economist at Oxford Economics as saying. “It seems like the engine of the U.S. economy continues to hum along where it’s sputtering in other nations.”

The International Monetary Fund is projecting that gross domestic product in
the United States will increase by a bit over 2 percent this year, while growth will be below 1 percent in the European Union, the United Kingdom and Japan. Canada is projected to be just below 1.5 percent.

BBC attributed the healthier American economy to aggressive pandemic assistance programs, more flexible business and labor markets, and energy independence, with the latter factor saving the country from the shocks felt by European countries and others that resulted from Russia’s invasion of Ukraine.

The United States, though, does continue to experience elevated levels of inflation, with January prices increasing 0.3 percent from December and 3.1 percent from a year earlier, the Bureau of Labor Statistics reported. Core inflation – which excludes the volatile food and energy markets – was even higher, at 0.4 percent month to month and 3.9 percent year over year. Inflation in the “shelter” sector is driving much of the overall number; prices rose by 0.6 percent from December and by 6 percent from January 2023. This result, as high as it was, did, however, mark the 10th straight monthly decrease following an 8.2 percent increase in March.

“Shelter rose, but it’s not that it increased because of rents,” the chief economist at Middleburg Communities told Yahoo Finance. “It increased mainly because of hotels and motels, which haven’t been a problem over the last year, but they were a problem in January.”

The economist added that increases in shelter prices “signal continued strong demand for all forms of housing because the economy has been so strong.”

The National Association of Realtors reported that the median existing home price in December increased 4.4 percent from a year earlier to $382,600. Amid a long-run increase in prices, existing home sales in 2023 decreased 6.2 percent from the previous year and were at their lowest level since 1995.

“Obviously, the recent, rapid three-year rise in home prices is unsustainable,” the association’s chief economist said. “If price increases continue at the current pace, the country could accelerate into haves and have-nots. Creating a path towards homeownership for today’s renters is essential. It requires economic and income growth and, most importantly, a steady buildup of home

construction.”

Housing starts in January fell 14.8 percent from December and were 0.7 percent below the January 2023 level, according to the U.S. Census Bureau and the Department of Housing and Urban Development.

Mortgage rates remain high, and the Federal Reserve in January once again declined to reduce interest rates, leaving the target range for the Federal Funds Rate at 5.25 to 5.5 percent.

“Inflation has eased over the past year but remains elevated,” the central bank’s Federal Open Markets Committee stated in an announcement following its Jan. 30-31 meeting. It added, “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.”

Rate cuts are anticipated this year, but the January inflation data, which was released about two weeks after the Fed’s most recent meeting, may push them back.

“If this keeps up with another month or two of inflation staying high, you can kiss a June [rate cut] goodbye and we’re probably looking at September,” the chief market economist at Spartan Capital Securities told Reuters. “It’s a hotter-than- expected [January inflation] report and it’s part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten.”

As has typically been the case in recent years, the labor market posted solid numbers, with the economy adding 353,000 jobs in January and the unemployment rate staying at 3.7 percent, according to the Bureau of Labor Statistics.

“Job gains occurred in professional and business services, health care, retail trade, and social assistance,” the bureau noted. “Employment declined in the mining, quarrying, and oil and gas extraction industry.”

Analysts did note some possible signs of weakness in the report, particularly the decrease in average hours worked per week to 34.1.

“That number is typically a reliable gauge of employer demand for workers,” the chief economist for ZipRecruiter told Barron’s. “When consumer demand slackens, companies typically cut workers’ hours before cutting payrolls. Today’s work week reading flashes a warning sign for the economy that job cuts could be looming.”

Consumer confidence has increased, with The Conference Board’s January Consumer Confidence Index rising 6.2 percent from December and reaching a two-year high.

“January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” the board’s chief economist said.

The University of Michigan’s Index of Consumer Sentiment, meanwhile, rose only slightly from January to February but is now 19 percent higher than it was in February 2023.

“Consumer sentiment was essentially unchanged from January, rising 0.6 index points this month and solidifying the large gains from the past two months,” the university’s Surveys of Consumers director said. “The fact that sentiment lost no ground this month suggests that consumers continue to feel more assured about the economy, confirming the considerable improvements in December and January across various aspects of the economy.”

Business confidence also showed gains, with the Institute for Supply Management’s Purchasing Managers Index recording its biggest increase in more than a year from December to January.

“Demand remains soft but shows signs of improvement, and production execution is stable compared to December, as panelists’ companies continue to manage outputs, material inputs and labor costs,” the chair of the institute’s Manufacturing Business Survey Committee said.

The Dow Jones Industrial Average closed at 38,627.99 on Feb. 16, up 2.5 percent on the year. The S&P 500 Index ended the same day at 5,005.57, for a year-to-date gain of 4.9 percent.

The dollar on Feb. 16 was trading at 0.93 euros, 0.79 pounds, 150.35 yen and 7.19 yuan.

Even with largely positive economic news, predictions of a recession remain as some analysts cite hidden trends in the data. MarketWatch noted that a survey by the National Association of Business Economists found that nearly a fourth of respondents foresee a recession this year, Citi’s chief U.S. economist told CNBC that a downturn is likely starting in the middle of 2024, and Business Insider reported on an economic model that shows an 85 percent chance of recession in coming months. Whether these prognosticators turn out to be

Cassandras or just overly pessimistic will largely be determined by the American consumer – and the Federal Reserve.