February 29, 2024

         

    

     The U.S. economy is the prettiest horse in the glue factory. It has and is outperforming its peers as economic growth in China and Europe has steadily evaporated. The U.S. economy entered 2024 with considerable momentum and currently remains in growth mode despite geo-political risks and high borrowing costs. The ground on which it stands has been solid, but it may be softening based on mixed January data. If downside surprises broaden and continue with the economic data from February, it could be a sign of a pronounced moderation in growth and would elevate the risk of a recession.

  
Core Capital Goods
              

     The U.S. industrial sector was at stall speed in 2023 and continued in the first month of 2024, constrained by economic uncertainty and higher financing cost crimping capital expenditures/investment. Retail sales started the year with a dud. Consumer spending has been a key catalyst to the resilience in the economy. Its strength can be traced back to a strong labor market and gains in real household income. January’s larger than consensus decline was broad based. The source of weakness in sales was debated on whether the consumer was taking a breather after blow-out Christmas purchases, depleting savings, increasing reliance on consumer credit and severe weather during the month. Inclement weather was also thought to be culprit in the sharp decline in January’s housing starts.


Initial Unemployment
               

     Labor-related data continues to show resilience and cast doubts on the long-held narrative that the labor market is cooling and slowly coming back into greater balance. January’s employment report, coupled with upward benchmark revisions, was a blockbuster. The labor market remains tight as evidenced by the unemployment rate still near multi-decade lows. Weekly initial and continuing claims for unemployment benefits continue at relatively low levels that are consistent with a healthy labor market.

 

CPI Goods
     

    The Fed has not declared victory in its fight against inflation. Inflation remains elevated relative to the Fed’s 2% goal and progress towards that target stalled a bit in January. Both Consumer and Producer Price Indexes surprised modestly to the upside, largely due to greater price pressures within the service sector. Disinflation in the goods sector is also seeing some upside risks as the escalation of Israel and Hamas tension in surrounding regions has caused ships to re-route away from the Suez Canal and Red Sea to mitigate the risks of attacks. This has pushed container freight rates higher and is starting to elongate supply chains again.


Hourly Earnings

     The Fed has been communicating through Fed officials that the policy rate is likely at its peak, but rate cuts are not in the immediate future. Minutes from the late January FOMC meeting further emphasized this stance. Central banks, in general, are hesitant to telegraph too far in advance given the uncertainty of future data. The Fed will take a patient approach, waiting for more evidence that inflation is truly on a trajectory toward a sustainable 2% inflation level before easing rates. That path of inflation will likely be bumpy with easier financial conditions giving rise to the wealth effect and still-tight labor market give rise to wage growth. February ended with the release of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) deflator. While the year-over-year headline and core numbers generally matched expectations at 2.4% and 2.8%, respectively, higher than anticipated personal income and supercore services ex-housing components will likely keep the Fed in a cautious and patient mode.