Economic Data Tracker – 
Inflation boogeyman won’t go away

Economic Data Tracker

April 26, 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

More good news regarding the Port of Baltimore. A temporary 35-foot-deep channel opened this week, well ahead of schedule, allowing limited access for larger ships to public terminals. Meanwhile, salvage efforts at the F.S. Key Bridge and cleanup in the channel are progressing. 

The travel impulse remains strong. Daily air passenger counts are still running nearly 6% above the same week in 2023 and 2019. Despite higher fares industry wide, this trend will likely persist. In fact, Delta Airlines said earlier this month that it projects record advance bookings for the summer.

Most of the activity-based indicators (slides 5 and 6) continued to gradually improve this past week. 

What’s new this week

  • Inventories and net exports ding 1Q24 economic growth, though consumers still solid (slide 7).
  • The Fed’s favorite inflation gauge’s pace held steady as did housing (slide 8).
  • New home sales up 3 of past 4 months, prices pop to 6-month high (slide 9).
  • New durable goods orders up in March as commercial aircraft orders return (slide 10).
  • Big 4 indicators point toward continued growth for the U.S. economy (slide 11).
  • Canal issues still hampering global trade (slide 12). 
  • Global shipping costs retreating, but still elevated due to canal issues (slide 13).  

Our take

Most of the incoming economic data remains solid. That’s not to imply that everything is rosy – there are certainly challenges for businesses and individuals.

Yet, investors remain extremely skeptical, which is understandable given nearly two years of nonstop “a recession is coming!” messaging. Sorry, not sorry that we contributed to that recession messaging; pointing out risks is part of our job. Nonetheless, the mythical inflation boogeyman is alive and well, and living “rent free” in the heads of most investors. Some have truncated the famous quote by the late, great economist Milton Friedman to be “Inflation is always and everywhere.”

Indeed, prices have dramatically reset to higher levels following the pandemic for everything from food and everyday goods to homes and automobiles. Sadly, that’s not likely to change, which is typically what happens to prices.

But inflation is the rate of change for prices. By nearly every measure, inflation has moderated, especially relative to 2021, 2022, and 2023. Yet, the inflation boogeyman is seemingly creeping around every corner and hiding under every data point.

For instance, when the first quarter gross domestic product (GDP) data was released earlier this week, investors seized on the increase in the relate price index. Right on cue, news headlines began appearing asking about the threat of stagflation, which describes an economy that is experiencing high inflation, low economic growth, and high unemployment.

Flatly, the U.S. isn’t confronted with any of those issues. While inflation hasn’t returned to the extremely low pre-pandemic levels just yet, it isn’t high. Economic growth shows the economy isn’t weak. While it may be sluggish at times, growth isn’t low – it’s generally running at the pre-pandemic trend currently. And, if anything, unemployment is too low rather than too high. To wit, it has remained under 4% for 26 months (and counting) – the longest stretch since the late 1960s.

Yes, there is an ongoing risk of inflation running hotter; thus, we’ll concede that inflation isn’t an irrational fear on the part of investors. To be fair, though, our base case for nearly two years has been that inflation wouldn’t get all the way down to the extremely low pre-pandemic levels due in large part to the housing supply deficit.

Conversely, investors should accept that inflation – like most economic data and trends – doesn’t always move in a neat, straight line. It’s been a bumpy path, which will likely persist. By the way, this isn’t some failing on the part of the Federal Reserve (Fed). As we discussed here last week, the Fed doesn’t control prices, nor the factors of production in the economy. While it does heavily influence the cost of capital, the Fed doesn’t control lending, land, labor, or other resources.

We maintain our belief that inflation will moderate as the year progresses based on two factors. First, the gradual cooling of economic growth witnessed during the first quarter will continue to dampen demand and, in turn, inflation. Second, while housing supply isn’t going to be completely fixed anytime soon, it is improving. Within first quarter GDP, residential housing increased 13.9%, the most in two full years.

Hence, while inflation is still an issue, it’s not the ONLY issue. Furthermore, inflation isn’t intractable. Though the remedy is unpleasant, the Fed and central banks know how to deal with inflation – holding rates higher, albeit for a little while longer. 

Bottom line

The U.S. economy remains resilient and should sidestep a recession. Most economic data continues to steadily improve. Yet, the cumulative impact of higher rates does weigh on economic growth. We maintain our view that the Fed will reduce rates in the summer. 

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