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- A tight labor market in the first quarter of 2024, and
- Persistent inflationary pressures.
The unemployment rate in March 2024 was 3.8%, a slight decline from 3.9% in February. The Non-Farm Payrolls (NFP) report showed that the economy created 315,000 jobs in March. In January and February, the economy also added well over 200,000 jobs each month, with 256,000 new jobs in January and 236,000 in February.
Looking at the NFP data alone, it is clear why the unemployment rate declined in the first quarter to 3.8%. Simply put, more people found jobs.
With more people employed, there is a higher flow of money into the economy as individuals have more disposable income to spend on goods and services. This increased demand for products and services leads to higher prices, resulting in demand-pull inflation, which could explain the stickier inflation observed in the first quarter of 2024.
Another reason for persistent inflation is the impact on the supply side of the economy.
Interest rates in the United States are currently at their highest level in over 20 years. This means that the business sector is feeling the pinch of high borrowing costs, as they have to pay back loans at a premium. These increased costs are ultimately passed down to consumers in the form of higher prices for goods and services, further contributing to the higher inflation picture in the country.
Gross Domestic Product (GDP)
GDP growth rate is another crucial factor to consider when analyzing the fundamentals of the U.S. economy.The quarter-on-quarter GDP growth rate has been declining. In the third quarter of 2023, the economy grew by 4.9%, followed by slower growth of 3.4% in the fourth quarter of 2023 and a further deceleration to 1.6% in the first quarter of 2024.
Part of the reason for this slowdown is the impact of higher interest rates. When rates remain elevated for an extended period, it can push the country into a recession. As the International Monetary Fund (IMF) notes, "In a higher rates-for-longer scenario, however, many firms are drawing down cash buffers as earnings moderate and as debt servicing costs rise.
The GFSR shows increasing shares of small and mid-sized firms in both advanced and emerging market economies with barely enough cash to pay their interest expenses. And defaults are on the rise in the leveraged loan market, where financially weaker firms borrow. These troubles are likely going to worsen in the coming year as more than $5.5 trillion of corporate debt comes due." As more firms default and businesses shut down, layoffs occur, and a recession becomes more likely.
In the latest GDP report, something interesting to note is that consumer spending slowed to 2.5% from 3.5%, mainly due to a fall in goods consumption. This could be attributed to the increased cost of goods resulting from higher borrowing costs, which are passed on to consumers.
Additionally, exports slowed sharply to 0.9% from 5.1% the previous quarter, while imports surged to 7.2% from 2.2%. The reason for this could be that consumers are finding it more affordable to purchase goods from other countries rather than domestically, as foreign products are relatively cheaper. Similarly, other countries may find it less attractive to buy from the U.S. due to the higher prices resulting from domestic inflation.
In my opinion, however, a contracting economy is what the Fed wants to initiate the cutting cycle. A slowing economy means fewer jobs, less money circulating, and ultimately declining inflation, which would prompt the Fed to intervene by cutting interest rates and potentially implementing quantitative easing measures to stimulate the economy.
This could be better explained by the high employment numbers and elevated interest rates.
Looking Ahead: Week of May 12-18, 2024
Several key economic reports are scheduled for release in the coming week, starting with inflation data.
While the first quarter of 2024 was robust in terms of the labor market, the April NFP report and the first-quarter GDP numbers suggest signs of cooling in the economy.
This is the first indication that inflation may be cooling down, at least from the demand side of the equation.
Regarding the Producer Price Index (PPI), which measures inflation at the wholesale level, I don't expect much change since the high interest rates are not directly impacting the supply side of the inflation picture. Therefore, the PPI is likely to align with projections and the consensus of most economists.
However, for the Consumer Price Index (CPI), which measures inflation at the consumer level, we are bound to see some decline, mainly because the flow of money in the economy has been impacted by the tighter monetary policy.
Finally, the weekly unemployment claims report is another volatility event to watch. It is possible that we will see a relatively higher number of people filing for unemployment benefits.
Combining all these factors, it is crucial to analyze them to understand the potential impact on the Fed's interest rate policy, as all roads lead to interest rates.
If the inflation figures come in higher than expected, it would signal that the Fed's higher-for-longer interest rate policy is not effectively curbing inflation. In this scenario, the central bank would likely maintain or potentially raise interest rates further, resulting in a stronger U.S. dollar.
Conversely, if inflation data comes in lower than anticipated, it would suggest that the higher interest rate policy is working, and the Fed may be more inclined to begin its cutting cycle sooner, potentially leading to a weaker dollar.
Retail sales data is another important release scheduled for the coming week. Based on the GDP numbers released on April 25, 2024, which showed that consumer spending was down to 2.5% from 3.3% due to a fall in goods consumption, it is likely that retail sales figures will also be lower.
The April NFP report showed that the economy created far fewer jobs, at 175,000, down from 315,000 in March. Cumulatively, there were 851,000 unemployment claims filed in the month of April alone, a stark mismatch between the number of jobs created and the number of people seeking employment opportunities.
In the latest GDP report, something interesting to note is that consumer spending slowed to 2.5% from 3.5%, mainly due to a fall in goods consumption. This could be attributed to the increased cost of goods resulting from higher borrowing costs, which are passed on to consumers.
Additionally, exports slowed sharply to 0.9% from 5.1% the previous quarter, while imports surged to 7.2% from 2.2%. The reason for this could be that consumers are finding it more affordable to purchase goods from other countries rather than domestically, as foreign products are relatively cheaper. Similarly, other countries may find it less attractive to buy from the U.S. due to the higher prices resulting from domestic inflation.
In my opinion, however, a contracting economy is what the Fed wants to initiate the cutting cycle. A slowing economy means fewer jobs, less money circulating, and ultimately declining inflation, which would prompt the Fed to intervene by cutting interest rates and potentially implementing quantitative easing measures to stimulate the economy.
Inflation
The Core Personal Consumption Expenditures (PCE) index, which excludes volatile food and energy prices, shows a stickier inflation picture in the country.This could be better explained by the high employment numbers and elevated interest rates.
Looking Ahead: Week of May 12-18, 2024
Several key economic reports are scheduled for release in the coming week, starting with inflation data.
While the first quarter of 2024 was robust in terms of the labor market, the April NFP report and the first-quarter GDP numbers suggest signs of cooling in the economy.
This is the first indication that inflation may be cooling down, at least from the demand side of the equation.
Regarding the Producer Price Index (PPI), which measures inflation at the wholesale level, I don't expect much change since the high interest rates are not directly impacting the supply side of the inflation picture. Therefore, the PPI is likely to align with projections and the consensus of most economists.
However, for the Consumer Price Index (CPI), which measures inflation at the consumer level, we are bound to see some decline, mainly because the flow of money in the economy has been impacted by the tighter monetary policy.
Finally, the weekly unemployment claims report is another volatility event to watch. It is possible that we will see a relatively higher number of people filing for unemployment benefits.
Combining all these factors, it is crucial to analyze them to understand the potential impact on the Fed's interest rate policy, as all roads lead to interest rates.
If the inflation figures come in higher than expected, it would signal that the Fed's higher-for-longer interest rate policy is not effectively curbing inflation. In this scenario, the central bank would likely maintain or potentially raise interest rates further, resulting in a stronger U.S. dollar.
Conversely, if inflation data comes in lower than anticipated, it would suggest that the higher interest rate policy is working, and the Fed may be more inclined to begin its cutting cycle sooner, potentially leading to a weaker dollar.
Retail sales data is another important release scheduled for the coming week. Based on the GDP numbers released on April 25, 2024, which showed that consumer spending was down to 2.5% from 3.3% due to a fall in goods consumption, it is likely that retail sales figures will also be lower.
The April NFP report showed that the economy created far fewer jobs, at 175,000, down from 315,000 in March. Cumulatively, there were 851,000 unemployment claims filed in the month of April alone, a stark mismatch between the number of jobs created and the number of people seeking employment opportunities.
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