Economic Commentary

December marked another month of solid job growth and fast wage growth

January 17, 2024
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Highlights from the Monthly Review for January 2024:

The solid momentum for hiring and consumer spending at the end of 2023 should carry into early 2024, pushing off recession fears until farther into the year. This could cause some inflation trends (especially higher costs for housing and services) to linger longer, supporting our call of a later and more modest shift to policy easing from the Fed.

Key Takeaways:

Economic Review: U.S. economic machine still running as new year begins

December marked another month of solid job growth and fast wage growth, which should be enough to maintain a healthy level of consumer activity in early 2024. Easier financial conditions also supported activity as evidenced by the jump in light vehicle sales during December. Unfortunately, rising wages come with the downside of a more protracted slowing in inflation, keeping pressure on the Fed to hold monetary policy at a restrictive level for an extended period. (pg. 2)

Financial Markets: Investors cheer as the Fed signals no more rate hikes

The S&P 500 rallied in December as Fed policymakers signaled no more rate hikes and investors gained more optimism that the U.S. economy could achieve a soft landing. Interest rates ended 2023 on the downtrend as the bond market priced in a sooner start to Fed easing. We think the Fed will wait until at least until May to begin cutting rates. The balance of risks and looser financial conditions argue in favor of Fed policymakers taking a gradual, data-dependent approach. (pg. 3)

The Outlook: Fading inflation should boost spending power

Excess pandemic savings and outsized income gains enabled consumers to boost spending over 2022 and 2023 even as prices for many good and services rose rapidly. While the pace of wage increases has moderated, household incomes are still rising and inflation has declined meaningfully. As a result, real incomes (adjusted for inflation) rose over much of 2023, helping to underpin sturdy consumer spending.

Looking ahead, declining inflation will offer support to real income growth, but we forecast a marked slowing in employment gains. As such, growth in household incomes should falter, leading to a pullback in consumer spending. Given these expectations, we still expect a mild recession by mid-year.  However, if strength in hiring is maintained, buoyant real income gains would power solid consumer spending in the year ahead. In this upside scenario to our baseline, the Fed could be able to achieve the coveted soft landing. (pg. 4)

Solid economic push carries into 2024.

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