This week’s reports show the economy remained strong in the fourth quarter of 2023, continuing to grow at a 5 percent annual pace with real growth of 2 percent and inflation in the 3 percent to 4 percent vicinity. Workers’ real (inflation-adjusted) earnings are still down, however, meaning the wealth is not reaching them.
By Robert Genetski
The Week That Was
Friday’s report on March consumer spending, incomes, and inflation showed the strong rate of spending continuing, at 5 percent on an annual basis. Although the Fed’s favorite measures of inflation shows the rate close to its target, the more popular inflation measures remain above 3 percent.
Yesterday’s GDP news shows a continuing strong fourth quarter economy. The fourth quarter GDI, which measures GDP based on income earned creating output, rose at a 6½ percent annual rate.
Things to Come
The closely watched ISM March business surveys are due this week. The February ISM service company survey showed moderate growth cut strong new orders and high inflation. The March surveys on inflation provide an early clue to prices. Our analysis indicates inflation remains in the 3 percent to 4 percent vicinity.
The March employment report to be released n Friday is likely to continue to show private jobs increasing by close to 200,000. Weekly unemployment data show the labor market remains tight, and strong fourth quarter profits are consistent with further growth in jobs.
Market Forces
With little significant news last week, the major indexes were stable this past week. In contrast, small cap stocks rose by 1 percent to 2 percent, broadening the market’s advance.
Friday’s revision of fourth-quarter GDP reported an advancing economy at a stable rate of
roughly 5 percent throughout the year and into Q4. Friday’s updated numbers for March show spending and wages soaring, at 9 percent annual rates. Inflation also remained a problem. Both the total and core rates rose at 3 percent to 4 percent annual rates.
With the reports of ongoing strength in spending, incomes, and inflation, Fed members are
downplaying the likelihood of cuts in interest rates. A continued failure of inflation to slow down will take rate cuts off the table for this year.
Despite the many signs of continued growth, real worker earnings have declined over the past three years and failed to increase of late. When living standards are flat to down, workers are suffering and the economy is not healthy.
As the Fed continues to sell securities, the ongoing pressure from monetary restraint will continue to weigh heavily on the economy. Although it has
taken longer than we anticipated for the economy to slow, the greater reliance on government spending, increased regulations and tight money will slow the economy.
Despite these looming problems, the stock market psychology remains positive and the Fed’s credibility for overcoming inflation is apparent in the performance of financial markets. To retain credibility, the Fed cannot promise to cut interest rate while inflation remains well above its target. Should the Fed cut rates prematurely, longer-term interest rates will head higher undermining support for stocks.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P 500 overvalued by 29 percent
Monetary Policy: restrictive
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