Where does the economy go from here?
That will be the question on the minds of consumers, economists and market watchers this week following back-to-back weeks of reports that showed the economy entered 2024 on a tear and with inflation heading back toward the Federal Reserve’s 2% annual target.
Unfortunately, the economic data will be slim this week. But that should give time to digest the heavy amount of information since the start of the year and also to focus on the next steps from the Fed when it meets next month.
“The ISM non-manufacturing Purchasing Managers Index (PMI) survey will be the highlight of a light week for data releases,” Comerica Bank wrote on Monday morning. “The survey is expected to show a pickup of activity among service-providing businesses and nonprofit institutions after the turn of the year; these firms account for roughly 70% of the U.S. economy.”
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“Consumer credit (originated by both bank and non-bank lenders) is expected to have edged lower in December; more timely data on consumer loans issued by commercial banks show a monthly decline at year-end,” they added. “The trade balance likely narrowed slightly in December, which contributed to the upside surprise from real GDP growth in the fourth quarter of last year.”
The Fed kept interest rates unchanged at its meeting last week but in comments to reports, Chairman Jerome Powell threw cold water on the idea of a cut in March while leaving open the door to future reductions in interest rates.
In an interview with the CBS show “60 Minutes” on Sunday evening, Powell explained the rationale for waiting before cutting rates.
“Growth is going on at a solid pace,” he said. “The labor market is strong: 3.7% unemployment. And inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.”
“And, you know, we want to see more evidence that inflation is moving sustainably down to 2%,” Powell added. “We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”
Friday’s blockbuster jobs report from the government is likely to give Powell and his colleagues some pause as well as breathing room as it provided little evidence the economy or the labor market is in danger of an imminent recession.
“The trends we see in today’s job report are likely to be taken by the Fed as a reason for caution – we may see an early spring but likely not an early interest rate cut,” said Lightcast Senior Economist Rachel Sederberg on Friday.
While the economy ended last year on a strong note, the expectation was that it would cool down as the calendar turned to 2024. Yet, early forecasts for economic growth in the first quarter and beyond have instead been raised.
Last week, the International Monetary Fund boosted its projection for global growth to 3.1% from its October estimate of 2.9%, citing “greater-than-expected resilience” in the U.S. economy. The Federal Reserve Bank of Atlanta’s GDPNow forecast has the U.S economy growing at a 4.2% clip in the first quarter. At the same time, inflation has moderated to such a degree that consumer expectations about how much it will rise this year are now 2.9% – down from 3.1%.
Still, prices remain a major concern for many, a recent survey by Santander Bank found. “Inflation remains the Top obstacle to achieving financial prosperity for middle-income Americans,” Santander found, though it noted that “there are some early signs that concerns are easing.”
That’s not to say everyone sees 2024 as without some economic headwinds.
“On the one hand, continued economic resilience indicates that a recession is not imminent,” BCA Research wrote on Monday morning. “On the other hand, it also highlights the probability of the alternative ‘no landing’ scenario. At the start of the year our Global Investment strategists raised their subjective probability that the U.S. economy will overheat again this year to 30% from 20%.”