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The U.S. economy continues to defy expectations. Despite predictions that it should be entering into a recession at any time, the economy continues to advance while inflation remains at bay. The economy grew 3.9% in the fourth quarter, more than a point stronger than economists expected. Growth in 2023 was 2.5%, a stunning increase over the 1.9% expansion in 2022. Consumer spending, which accounts for 75% of GDP, increased 2.8%, just marginally below the third quarter pace of 3.1%. Spending on both goods and services rose, with an emphasis towards discretionary categories. Retail inventories, which adds to GDP, surged 0.8% in December, contributing to the better-than-expected quarterly growth. The core price index, another measure of inflation and one of the indicators the Federal Reserve prefers as a longer-term inflation measure, increased 2% for the quarter, matching the lowest increase in three years. The take-away from this latest reading on the health of the U.S. economy is similar to the Goldilocks scenario - falling in the middle of not-off-the-charts good, but also not close to a recession. In other words, just right. Continued growth depends largely on the resilient consumer, who has managed to stay in the game despite high interest rates.
Key Indicators this Week
Spending/Income/Inflation – It should come as no surprise that spending in December was off the charts, given the strength of the economy in the fourth quarter. Personal consumption, which includes spending on both goods and services, surged 0.7%. Not only was this above expectations but it was the best December in three years. Even on an inflation adjusted basis, spending was strong at 0.5%, matching the strongest pace since 2021. Incomes were up 0.3%, as expected. The differential between spending and income pushed the savings rate lower from 4.1% to 3.7%. On the inflation front, the Fed’s preferred measure, core PCE, increased 2.9% in December from a year earlier. This is the lowest level since March 2021, down from a peak of 5.6%. While the Fed would like to see a slower pace in consumption to guard against a reboot of inflation, the progress made on bringing inflation lower will score more points in favor of cutting interest rates sometime year. Odds are growing for the first cut to happen in May rather than March.
Housing – New home sales surged 8% in the last month of 2023, the biggest increase in a year. Mortgage rates were more than a full percentage point lower at the end of year, spurring the increase in sales. The median price of a new home fell for the fourth month in a row as the supply of homes available reached the highest level in more than a year. Prices are 6.6% lower from a year ago, the first annual decline since 2019. This explains why homebuilder sentiment in January climbed the most in nearly a year. The measure of expected sales increased the most since June 2020, while a gauge of buyer traffic rose to a four-month high.
Leading Indicators – The Conference Board’s Leading Index of economic indicators (LEI) measured -0.1% in December. While still negative, this was the best reading since the index turned negative in April 2022. LEI is used to determine if the economy is getting better or worse. One could say the continued negative reading does not bode well for the economy, but one could also say the economy is getting” less bad” which might be interpreted as getting better. Six of the ten indicators were positive in December, a big improvement over the past few months. Unfortunately, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence as of December.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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