Economic Data Tracker – 
Green shoots continue, projecting stronger for long

Economic Data Tracker

March 22, 2024

Our weekly view on the economy including rationale on GDP, jobs report, and Fed policy decisions. Download the entire weekly edition to view timely charts and data providing a comprehensive picture of how incoming economic data affects our economic outlook.

Trend watch

Spring break continues to bloom. Air passenger counts climbed to 17.7 million, the highest since early August. Hotel occupancy rose to its highest level since October. The remaining activity-based indicators (slides 5 and 6) also improved, generally following typical spring patterns.

What’s new this week

  • Existing home sales jump from extreme lows, while prices ticked up, too (slide 7).
  • New housing activity continues to gradually improve despite higher rates (slide 8).
  • Leading indicators tick higher for first time in two years (slide 9).
  • SPG’s Manufacturing and Services indices continue to expand in March (slide 10). 

Our take

At the Federal Reserve (Fed) meeting this week, policymakers kept the federal funds rate unchanged (target range of 5.25%-5.50%). Within the committee’s quarterly economic projections, officials now see stronger near-term economic growth but similar inflation next year and fewer rate cuts next year and in 2026. For this year, though, they still see the likelihood of three quarter-point (0.25%) rate cuts.

During the post-meeting press conference, Fed Chair Jay Powell did what he needed to do – alleviating the so-called Fed-induced recession fears. He painted a picture of a resilient economy and a committee that is dedicated to achieving a soft landing.

While the broad strokes probably didn’t change – chiefly the Fed’s rate cut expectations in 2024 – the Fed seems more intent on achieving a soft landing rather than being resigned to needing a recession to reset inflation. Moreover, the Fed appears to be acknowledging that rates are overly restrictive right now. Thus, rate cuts in 2025 remain a likely option to maintain the resilient growth seen of late.

That seems to jive with green shoots seen in most economic data – from solid consumer spending trends to continued hiring and business investment. This was confirmed by the index of leading economic indicators, which ticked higher for first time in two years.

Additionally, the weaker segments of the economy appear to be improving as well; specifically, manufacturing and housing. After stumbling during much of 2023, several manufacturing gauges showed steady improvement in February and March. Similarly, existing home sales – which were crushed for roughly two years due to higher rates – have increased in three of the past four months. Furthermore, forward-looking indicators such as new building permits for single-family homes have now gone 14 months without a decline.

The green shoots bolster our view that the U.S. will avoid a recession this year. That’s not to say there will be dramatically stronger economic growth this year. Continued higher interest rates weigh on economic growth.

More importantly, this solid economy has been achieved without any “outside” help. No rate cuts. No tax cuts. No additional fiscal spending. No gimmicks. Yet, while inflation has retreated from peak levels, there have been flickers of price increases, which will likely persist. For instance, crude oil prices increased nearly 10% during January and February, climbing above $83 per barrel this week. (It has given back some of those gains in recent days, retreating nearly $3.)

Accordingly, the Fed’s patience appears even more appropriate given a few recent upticks in inflation. That said, taming inflation was always going to be a bumpy path on a month-to-month basis, which necessitates a longer, more patient view on the part of policymakers.

Powell reinforced the notion that the Fed is increasingly more worried about growth as opposed to a myopic focus on the potential for upside inflation surprises. In other words, the Fed appears to be looking for an excuse to cut rates.

We maintain our view that the Fed will begin lowering rates this summer, most likely in June. That would ease financing pressures on consumers and businesses alike, making a soft landing more achievable. Yet, simply reducing interest rates slightly wouldn’t be accommodative monetary policy. In other words, lowering the Fed funds target rate to say 5% would still be restrictive. That is much of the reason why the Fed doesn’t have to wait until inflation moves all the way down to its 2% target, along with considerable lags between when the Fed raises/lowers interest rates and when it fully impacts the economy.

Bottom line

The U.S. economy remains resilient and should sidestep a recession. After several months of crosscurrents, most economic data has steadily improved in recent weeks. However, the cumulative impact of higher rates will continue to weigh on economic growth.