The US economy is slowing, but not crashing. In the dark sciencethat's excellent news.
That's the message I took away from it current inflation datapublished on May 15, 2024, that showed US consumer prices rise 3.4% within the 12 months ending April 2024. This is a slight decrease from the three.5% year-on-year increase reported in March 2024.
In other words, prices are rising, but not as much as they used to. That's excellent news for buyers. The US economy is much from that 9.1% annual inflation seen in June 2022.
While energy and housing prices rose in April, these increases were relatively modest. Meanwhile, food prices remained stable in comparison with last 12 months and even fell by 0.2% in comparison with March. In addition, automotive buyers were lucky: prices for brand spanking new and used cars fell 0.4% and 6.9%, respectively, in April.
The “core” consumer price index – This doesn’t take volatile food and energy prices under consideration and is usually considered to be higher at predicting future inflation than the so-called “overall” CPI numbers – has also fallen barely. After recording a year-on-year increase of three.9% in January and three.8% in February and March, it slowed to three.6% in April.
So the general report is comparatively positive: it didn’t show the rise in inflation that many consumers feared, and the reported inflation rates were actually barely below market expectations.
As an economistI see this data report as further evidence that economic growth is slowing – in a superb way. The economy grew by a lower than expected rate of 1.6% in the primary quarter of 2024, in accordance with the most recent gross domestic product data from the Bureau of Economic Analysis. The latest job report also showed a Slowdown in hiringand the most recent data on vacancies also showed a slowdown within the labor market.
Why the Fed is watching closely
The predominant goal of the Federal Reserve is that this discover a balance between two goals: Maintaining stable employment and ensuring price stability. This is finished by controlling and influencing rates of interest.
Lowering rates of interest stimulates the economy, which promotes economic growth and job creation – but that may fuel inflation. An rate of interest increase has the alternative effect: economic growth slows, which curbs inflation but additionally hinders employment.
When inflation began to rise dramatically within the wake of the COVID-19 pandemic, the Federal Reserve responded with a two-year campaign of rate of interest hikes – currently at a 23-year high. Because this raises the price of borrowing, investors and potential homebuyers are fascinated about seeing the Fed lower rates of interest.
After the May report, I don't think the Federal Reserve shall be in a rush to chop rates of interest from their current high levels. There is a slowdown, however the slowdown is so regular that it shouldn’t be dragging prices down at a rapid rate.
This is undoubtedly frustrating for the Fed – the one… Inflation goal of two% – in addition to for potential home buyers. But it’s evidence that the economy is currently stable. Inflation shouldn’t be rising and consumer spending remains to be rising, in accordance with the Bureau of Economic Analysis. March, Consumer spending increased 5.8% 12 months over 12 monthsa rise from the February rate of 4.9%.
All eyes are on the American buyer
For the longer term we hope for a “soft landing“ — in economist jargon, if the Fed slows inflation without triggering a recession — will depend largely on U.S. buyers. Consumer spending balances out about two thirds of US gross domestic product.
If American shoppers suddenly stop spending, inflation will slow significantly, job opportunities will disappear and the gross domestic product could shrink. At that time, the Fed will turn its attention from inflation to stimulus and rates of interest will fall.
I mention this because a recent report from the Federal Reserve Bank of St. Louis showed that… Worrying rise in consumer bank card default rates. If much of the recent increase in consumer spending is on account of Americans relying more heavily on bank cards, then the economy could also be on shakier ground than it seems.
The excellent news is that crime rates are still well below where they were last 12 months Great Recession that lasted from December 2007 to June 2009. While this data could also be worrying, there isn’t any must panic just yet.
In short: Even if inflation rates are still not within the Fed's favor, the economy appears to be on a stable path – for now.
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