The Economy Is Still Flying High
Is this a soft-landing? Or a no-landing?
This week the Commerce Department said the economy grew at a 2.4 percent pace in the second quarter, much higher than expected. The Federal Reserve’s staff told officials that they are no longer projecting a recession given the resiliency of the economy, especially consumer spending.
Consumer spending rose 0.5 percent in June, boosted by an upswing in truck buying and people spending more on financial advice and housing. Recreation spending and spending on natural gas utilities were also up.
Personal incomes rose by just 0.3 percent for the month, so Americans were tapping into their savings and credit to support the increase in spending. The personal saving rate declined to 4.3 percent for the month.
Despite all this spending, inflation continued to moderate. Compared with the prior month, the personal consumption expenditure (PCE) price index rose 0.2 percent, a slight pickup from last month’s 0.1 percent rise. Core PCE prices, however, slowed to a 0.2 percent gain, the slowest rate in months. Food prices dropped for the month, tumbling 0.1 percent. Energy prices increased 0.6 percent.
Compared with June of last year, the PCE price index is up three percent. Prices for goods decreased 0.6 percent over the past 12-months and prices for services increased 4.9 percent. Food prices are up 4.6 percent, and energy prices decreased 18.9 percent. Excluding food and energy, the PCE price index increased 4.1 percent from one year ago.
The underlying inflationary pressures also appear to be easing. For this we look to the Federal Reserve Bank of Dallas’s 16 percent trimmed mean inflation. It is calculated by stripping out the fastest and slowest growing prices in the month. The one-month annual rate dropped down to 2.5 percent from 3.5 percent a month ago, a sign of significant progress.
Getting to Two Percent Still Looks Hard
But are they easing enough? A lot of economists have lately taken to urging the Fed to give up the pursuit of its two percent inflation target, arguing that three percent might be more appropriate. The Fed, however, continues to insist on sticking to the two percent target. Chairman Jerome Powell has frequently said that he believes getting to that target will require several quarters of “below trend” growth, which means growth below 1.8 percent.
Federal Reserve Chair Jerome Powell at the press conference following the Federal Open Market Committee meeting on July 26, 2023, in Washington, DC. (AP Photo/Nathan Howard)
In other words, the data this week that has inspired such confidence that we are heading for a soft-landing should likely be interpreted as signaling that monetary policy is not yet restrictive enough. We do not appear to be approaching anything like below-trend growth. And without a slowdown in growth, it’s hard to imagine how inflation can be reliably brought down to two percent.
Even though personal income was up by just 0.3 percent in June, wages and salaries were up by much more, soaring 0.6 percent. This no doubt helped consumers feel “flush” with cash even as a drop in dividend income dragged down the total income numbers.
And it looks like that feeling is not going away. The University of Michigan’s consumer sentiment index rose for the second straight month, exploding 11 percent higher than the June level. Joanne Hsu, the director of the survey, said all components “improved considerably.” Leading the way up was an 18 percent surge in long-term business conditions and a 14 percent short in short-run conditions. That will likely fuel more spending in the months ahead, adding to GDP and bringing us further away from any sort of landing at all.
Analysts at Bank of America say the excess savings created by the pandemic stimulus measures likely has another eight months or so to run. So, we might be flying high until the second quarter of next year.
