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Has the US Economy Gotten Too Hot? Wall Street Doesn't Think So
AInvestTuesday, Feb 20, 2024 4:14 am ET
2min read

Recently, significant figures relating to inflation, economic growth, and the labor market are all showing the economy is still overheating. However, many economists are not disturbed by these surprises and point out that they are influenced by peculiar economic activities at the beginning of the year.

From a very big picture perspective, it's still looking good, said Brian Rose, senior U.S. economist at UBS Global Wealth Management.

Prices unexpectedly rose in January after several months of essentially cooling inflation, according to last week's Consumer Price Index (CPI) and Producer Price Index (PPI) reports.

These figures are the worst investors could expect on the outside. However, many economists suspect that the inflation increases were a one-time event and could be related to companies resetting prices at the beginning of the year, including labor-oriented services such as medical care and auto-repairs increased substantially, which indicates that employers felt they needed to keep up with the high labor costs by raising their prices.

Questions about other data are also focused on strange phenomena related to January.

The latest non-agricultural employment data from the Department of Labor shows that the US economy added 353,000 jobs last month - far above economists' expectations and the greatest increase since January last year.

The problem is that the 353,000 is an adjusted number for the season. Every year, many companies hire employees before the holidays and then lay off some employees in January.

To measure recruitment trends better, the Department of Labor considered these seasonal patterns, which resulted in a significant drop in actual employment in January translating into growth after seasonal adjustments.

However, there are also some investors saying that this year's January adjustment was too aggressive, and they think companies laid off fewer workers than usual because they hired fewer people in previous months.

Thus, many expect that January's strong employment growth will be offset by weak data over the next few months when the Department of Labor expects a seasonal rebound from recruitment.

A striking figure in a series of strong economic reports was released last Thursday - last month retail sales fell by 0.8%, indicating that resilient consumer demand may finally be starting to weaken, but many analysts said adverse weather conditions may have held back spending.

In terms of overall growth, US Gross Domestic Product (GDP) figures show that after adjustments for inflation, economic growth was 4.9% in the third quarter and 3.3% in the fourth quarter of last year. Both of these figures are much higher than the level of 2% which many economists see as a level of growth sustainable for the economy without heightened inflation.

However, since the end of 2022, another growth indicator - Gross Domestic Income (GDI) - has consistently been far lower than GDP data, with GDI growing at just 1.5% in the latest third-quarter figures of 2023.

Theoretically, GDP and GDI should be equal. Government officials in the Department of Commerce, who prepare these two reports, consider GDP to be more reliable because it is based on more timely and extensive data.

We still think that real output is at most growing modestly above potential, despite the much stronger GDP data, analysts at Goldman Sachs wrote in a recent report, in which they referenced GDI data and their own growth forecasts.

As of last Friday, futures showed a probability of a Federal Reserve rate cut even before the June policy meeting exceeding 50%. They also noted that investors believed the Federal Reserve could carry out at least three rate cuts before the end of this year with each cut being 25 basis points.

Nonetheless, not all analysts completely ignore recent economic data.

Global chief economist at Vanguard, Joe Davis, commented that while there isn't concrete evidence, recent data suggest that the current interest rates haven't put as much drag on the economy as officials at the Federal Reserve had imagined.

I'm growing concerned that there's going to be a strong desire to cut rates when the labor market has not fully balanced—it's cooled but it's still tight, he added.

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