Notes on the Economy – Q1 2024 Summary

IT’S A PUZZLE

The U.S. economy closed out 2023 on a surprisingly strong note. The advance estimate for U.S. real GDP growth in the final quarter was an annualized 3.3%. This was the sixth consecutive quarter in which actual annualized economic growth exceeded the growth of the economy’s potential output. The strong growth was not a fluke. Rather, growth was generally well balanced and undistorted by an unusual surge in a single sector.

Still, some economic data presents a puzzle. Although headline growth figures are positive, many background elements are negative. For instance, the unemployment rate was only 3.7% in January, near a 50-year low of 3.4%, but unfilled job openings are in a strong downtrend. Household leverage is well below its historical average, but leverage ratios, and consumer debt delinquencies are now on their way up. Such puzzling contradictions have become more prevalent in every sector of the economy over the course of the past year.

In contrast to the United States, global economic growth was on the slow side in 2023. Global real GDP grew 3.1% for the year, according to the International Monetary Fund’s (IMF) estimate, well below the 3.5% recorded for 2022 and the historical (2000-2019) average of 3.8%. In general, central banks are maintaining elevated policy interest rates that weigh on economic growth, but which also produce a slowdown in price inflation.

HEADLINES – WHAT’S IMPORTANT 

1. Inflation Is Not Quite Dead – Inflation has dropped a lot, but progress has slowed, and there has been some backsliding; annual CPI inflation hit 3.1% in January, but there will be further progress in 2024.
2. Interest Rates Have Peaked – At least that is what the Federal Reserve (Fed) policymakers now think, but rate cuts will not be in the cards any time soon.
3. Bond Portfolios Should Favor Longer-Term Issues – High-quality, longer-term bonds will pay decent interest while waiting for a change in Fed policy to bring about lower yields and capital gains.
4. Look for Opportunities To Add to Global Equities – The U.S. macroeconomic backdrop warrants caution, and election years are more volatile than normal, but the global opportunity set is excellent—be patient and cautious.

LOOKING AHEAD 

Comprehensive data indices suggest that the U.S. economy remains on a growth path in early 2024. For example, the purchasing managers indexes (PMI) compiled by S&P Global moved up in January. The US Manufacturing PMI reached 50.7, the US Services PMI 52.5, and the US Composite Output PMI 52.0. (Readings above 50.0 are indicative of an expansion in activity.) Still, growth is unlikely to come close to the fourth quarter’s 3.3%, more likely it will be closer to half of that.

Monetary policy works with long and variable lags, but with the federal funds rate maintained at its peak since July the negative impact on growth will likely be quite noticeable in 2024. Further, the puzzling contradictions referenced above would seem to support the contention that the economy is near, or in, a transition phase toward a slower level of growth. Also, to the seemingly contradictory employment and consumer financial data from late 2023, January 2024 retail sales can be added to the downbeat part of the mix. Sales surprised to the downside, dropping 0.8% for the largest decline since March 2023. The decline reverses the net gain retail sales experienced during the last four months of 2023.

Anti-inflation policies were a major factor in the slowdown of global growth in 2023. Central banks around the globe, and especially in developed economies, tightened monetary policies intending to restrict the growth of aggregate demand in order to relieve the persistently high upward pressure on prices that occurred in the aftermath of the COVID-19 pandemic. The IMF’s published 2023 aggregate economic growth estimate of 3.1% for the global economy, includes 1.6% for developed economies and 4.1% for emerging and developing economies. The IMF’s projected 2024 growth for those regions is 3.1%, 1.5% and 4.1%, respectively. The ongoing improvement in the inflation picture will probably result in monetary authorities beginning to ease interest rates during 2024, but the impact on growth will not be significant until 2025.

*The information contained within this edition of the Notes on the Economy Executive Summary is based on data released as of Feb. 20, 2024.