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World News | US economy sends mixed signals: Here’s what it’s all about

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The LATAM Airlines plane hit the vehicle on the runway (Image: Twitter / @AirCrash_)

WASHINGTON, Feb. 28 (AP) Maybe it’s too good to be true.

For a few weeks in late January and early February, the U.S. economy seemed to hit a rare sweet spot. Inflation has steadily slowed from painful heights. Growth and hiring have remained surprisingly strong despite the Federal Reserve’s imposition of increasingly higher interest rates.

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The thinking, perhaps, is that the Fed’s inflation fighters are trying to achieve the notoriously difficult “soft landing”: a slowdown in borrowing and spending enough to curb inflation without tipping the world’s largest economy into recession.

“We were looking for a soft landing,” recalls Diane Swonk, chief economist at accounting giant KPMG. “It was a bit of a joy.”

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Financial markets were clamoring for the first six weeks of 2023, with shares soaring on expectations the Federal Reserve could soon pause and eventually reverse a series of aggressive rate hikes that began nearly a year ago.

Then something went wrong.

It started on Valentine’s Day. The government said its closely watched consumer price index surged 0.5% from December to January, five times the increase from November to December.

Over the next week and a half, two more government press releases told essentially the same story: The Fed’s efforts to tame inflation weren’t even close to winning.

This realization brings up a related concern: If high inflation turns out to be more problematic than we think, the Fed could keep raising rates — and keeping them high — for longer than expected.

These rising borrowing rates will make a recession with layoffs and business closures more likely.

“It’s heartbreaking,” Swonk said. “That puts the Fed back into defensive mode, and they’re going to have to be firm about raising rates.”

Unsurprisingly, the stock market reacted to the prospect.

Here are the important signs to take a closer look at the economy during a complex period of high interest rates, still-punitive inflation and surprisingly strong economic growth.

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inflation

Consumer inflation has not been a big deal on average since the early 1980s, and it will pick up in the spring of 2021 as the economy emerges from recession and Americans are once again free to spend.

At first, Federal Reserve Chairman Jerome Powell and some economists thought the price recovery might be a temporary problem that would resolve itself once clogged supply chains return to normal.

But supply bottlenecks have persisted longer than expected, as has high inflation. To make matters worse, Russia’s invasion of Ukraine a year ago sent energy and food prices soaring. By June 2022, consumer prices were 9.1% higher than a year earlier — the worst year-over-year inflation in more than four decades.

By then, the Fed had already begun to respond with belated responses. It has raised its benchmark interest rate eight times since March 2022, the most aggressive tightening of credit since the early 1980s.

In response, consumer inflation fell slightly from its mid-2022 peak. It posted modest year-on-year growth for seven consecutive months as unimpeded supply chains and higher borrowing costs played a role in the economy, curbing overspending.

Financial markets appear ready to announce that the inflation dragon has all but been vanquished.

Then there was unexpectedly strong consumer inflation data for January. Two days later, the government reported that wholesale prices rose 0.7 percent from December to January, almost double what forecasters expected.

Next came bad news from the Fed’s most closely watched inflation measure: the government’s personal consumption expenditures price index. It accelerated 0.6% from December to January, well above the 0.2% pace from November to December.

On a year-over-year basis, prices rose 5.4 percent, slightly higher than December’s annual gain and well above the Fed’s 2 percent inflation target.

Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., said the PCE report “adds to the daunting task facing the Fed of getting inflation back to its 2 percent goal without sending the economy into a trough.” . consult.

One concern is that this time around inflation may be harder to slow than initially. Families are increasingly shifting spending from physical goods like patio furniture and appliances to experiences like travel, restaurant meals and entertainment.

Inflationary pressures have also shifted from goods to services, whose price increases may be more difficult to contain.

That’s partly because chronic labor shortages in stores, restaurants, hotels and other service industries have led many employers in those industries to keep raising wages to attract or retain workers.

In turn, these employers generally raised prices to compensate for their higher labor costs, fueling inflation.

Some economists expect the Fed to raise its benchmark rate by half a basis point at its next meeting, on March 21-22, after announcing just a 25-basis-point hike at its Jan. 31-Feb. 1 meeting .

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overall economy

The flip side of troubling inflation news is good news about the state of the economy — or what is thought to be good news in normal times.

Even saddled with rising borrowing rates, the economy is stronger and more robust than most forecasters think.

“The economy looks very different today than we thought in mid-January,” said Deutsche Bank economist Peter Hooper.

“Previously, we thought things were slowing down, the labor market was softening, wage and price inflation were falling.”

With inflationary pressures remaining, “expectations are growing that the Fed clearly has more work to do,” Hooper said.

After a slump in the first half of 2022, the economy regained its footing last summer. The country’s gross domestic product — the total output of goods and services — contracted again from January to March and April to June last year.

While one informal definition of a recession is two consecutive quarters of negative growth, most economists have brushed aside such concerns this time around. They point to the economy shrinking in early 2022 due to factors unrelated to its underlying health: dwindling business inventories and a surge in imports, which have widened the U.S. trade deficit.

Gross domestic product quickly regained momentum: from July to September, the annual growth rate was steady at 3.2%, and from October to December, the annual growth rate was 2.7%. Steady consumer spending contributes significantly to economic growth.

Economists still expect a recession sometime this year — they’ve been skeptical of a soft landing — but are now seeing it come later than they expected. A survey of 48 forecasters by the National Association for Business Economics on Monday found that only a quarter of respondents thought the recession would begin by the end of March, down from half the forecast in December.

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Work

The U.S. job market has been surprisingly strong during the economic turmoil of the COVID year. According to U.S. government records going back to 1940, 2021 and 2022 are the two best years for hiring.

Job creation is expected to slow this year. not too far. Employers added 517,000 jobs in January, up from 260,000 in December. Unemployment hit 3.4%, the lowest level since 1969.

What’s more, despite some high-profile layoffs in tech and other industries, American workers as a whole are enjoying almost unheard of job security.

Monthly government layoffs and layoffs fell below 1.5 million for the first time in 2021 and have remained at that level since. There are now about two job openings for every unemployed American on average.

But a strong job market also puts upward pressure on wages — and therefore prices. This means further inflation.

“The wage growth and labor market tightening that we’re seeing is consistent with 3.5% to 4% inflation, not 2% or 3%,” said KPMG’s Swank. “That’s the brutal situation we’re in. Reality.”

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consumer

Their jobs are secure, their bank accounts are still backed by pandemic-era savings, and Americans continue to spend, shrugging off higher interest rates and prices.

Retail sales rose at the fastest pace in nearly two years in January, rebounding from a tepid holiday shopping season. Even after accounting for inflation, consumers are spending after taxes at the fastest pace since March 2021.

Consumer spending on services, from health care to dining out to airfare, accounted for 95% of economic growth last year.

Mark Zandi, chief economist at Moody’s Analytics, estimates that consumers still have $1.5 trillion in “excess savings” — more than they would have saved if there hadn’t been a pandemic — from government aid and stagnant Unprecedented cuts. Go home when the epidemic is the worst.

Still, inflation continues to cause hardship for millions of families. Average hourly earnings, adjusted for inflation, have fallen for 22 straight months, government data show. Many low- and moderate-income households are turning to credit cards to maintain spending.

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housing

So far, the Fed’s rate hikes have had limited impact on the broader economy, but they have hit one industry hard: real estate.

Residential real estate depends on people’s willingness to borrow money for what is often the most expensive purchase of their life. The average rate on a 30-year fixed mortgage topped 7% last fall — more than double what it was in early 2022 — before easing back slightly as the Federal Reserve kept raising rates last year.

The damage is already severe. Sales of existing homes fell for the 12th straight month to a record high, according to the National Association of Realtors. The government’s GDP report showed that housing investment fell at an annual rate of nearly 26% from October to December, after falling 18% from April to June and 27% from July to September. (Associated Press)

(This is an unedited and auto-generated story from a Syndicated News feed, the content body may not have been modified or edited by LatestLY staff)


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