Does the economy seem to be going in the right direction? Investors on Wall Street think so for sure. This week, they pushed U.S. stocks to a new high.
Why all the hope?
One good thing about April is that inflation didn’t get worse. Wall Street and the Federal Reserve were shocked when inflation shot up in the first three months of the year.
Last month, Americans also spent less at stores, which some saw as a sign that the economy is slowing down.
Of course, most people don’t think it’s a good thing when the economy slows down. But the U.S. grew at a very fast rate in the second half of 2023. Many economists think that this fast growth has helped keep inflation high.
They say that the U.S. economy needs to grow at a more normal rate in order for inflation to drop to low levels seen before the pandemic. If people didn’t buy as much, businesses would have to freeze or even lower prices. This would help the Fed get inflation back to its goal level of 2%.
Kathy Bostjancic, chief economist at Nationwide, said, “We are getting back to a more normal economy.” “We haven’t seen any real signs of a slowdown yet.”
The April report on retail sales in the U.S. did, in fact, raise some red flags. In April, sales stayed the same, and they were revised lower in the two months before that.
Some economists think that people have spent all the money they have. Savings are down, the government stimulus from the pandemic is gone, and a lot of low- and middle-income families have maxed out their credit cards. They can only live on the money they get every week now.
An economist at Navy Federal Credit Union named Robert Frick said, “Many of our members are one blown transmission away from financial crisis.”
While this was going on, the manufacturing sector of the economy was already weak and hasn’t gotten any better.
In April, production stayed the same, and businesses don’t want to speed things up because interest rates are still high and people are spending most of their money on services instead of goods.
As a result, the economy was weak, and the gross domestic product only rose 1.6% in the first three months of 2024. This was after huge increases of 3.4% and 4.9% in the last two quarters of the previous year.
According to economists, the U.S. economy can only grow at a top rate of 1.8% per year before it starts to cause inflation.
“If you want to find reasons to be worried, you can find them,” said Jim Baird, who is the chief investment officer at Plante Moran Financial Advisors.
Baird, on the other hand, is not too worried. “You can also find reasons to be positive.”
He said that the strong U.S. job market was a big reason to be hopeful.
Companies have enough work to keep most of their current employees, so layoffs are very low compared to the past. The unemployment rate is still below 4%, and many businesses are still hiring.
Frick said, “Everything will be fine as long as we keep adding jobs.” “Jobs are still the key to the recovery.”
Frick thinks that businesses will keep adding a lot of jobs. He says that the number of jobs is still three million below the trend before the pandemic.
“We should be able to hire good people and spend good money through this year,” he said.
Though, if people can only count on their current income, they will have to cut back on spending even more.
Bostjancic said, “If you have a job and are making money, you are going to spend.” “The difference is only slight.”
It is thought that if people stop spending as much, inflation will likely start going down again toward the Fed’s annual goal of 2%. This would make it possible for the central bank to cut U.S. interest rates much later this year. The rate of inflation has stayed between 2% and 3%.
As long as prices go down, Baird said, “that’s fine.”
For the first time in 23 years, the Federal Reserve raised a key short-term interest rate in 2022 and 2023. They did this to fight the highest inflation in 40 years. Key parts of the economy, like housing and business investment, have been hurt by higher borrowing costs.
As expected by the markets, if the Fed starts to lower rates, it will help the economy and make it less likely that there will be a recession.
That being said, top Fed officials have said that investors and the Fed will need to see a lot more progress on inflation before they are ready to lower rates. The CPI for April was just the beginning.
This week, John Williams, the head of the New York Fed, told Reuters, “I don’t see any signs that there’s a reason to change the stance of monetary policy now.” “I don’t think we’ll get the boost in confidence we need to see in the near future on inflation’s progress toward our 2% goal.”
